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Wilfrid Laurier University MBA

Wilfrid Laurier University MBA

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Bu 628 part 2 Bu 628 part 2 Document Transcript

  • Richard Ivey School of Business The University of Western Ontario 9A86C043CENTURY PARK SHERATON SINGAPORESing Chee Ling prepared this case under the supervision of Professor Joseph J. DiStefano solely to providematerial for class discussion. The authors do not intend to illustrate either effective or ineffective handling of amanagerial situation. The authors may have disguised certain names and other identifying information toprotect confidentiality.Ivey Management Services prohibits any foim of reproduction, storage or transmittal without its writtenpermission. This material is not covered under authorization from Can Copy or any reproduction rightsorganization. To order copies or request permission to reproduce materials, contact Ivey Publishing, IveyManagement Services, clo Richard Ivey School of Business, The University of Western Ontario, London,Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright @ 1986, Ivey Management Services Version: (A) 2003-04-28Chua Soon Lye, Personnel Director at Singapores Century Park Sheraton, hadplayed a central role in the hotels program to build greater employee commitment.Though Mr. Chua was pleased with the smooth implementation of the workexcellence committees in the hotel, he wondered if the base of employeeinvolvement was firm enough to move to even greater employee responsibility indecision making in the future. Over drinks in the hotels lounge, Mr. Chuaelaborated upon his concerns. The work excellence committee was formed within this organization to achieve the goals of increased organizational effectiveness and improved employee welfare through a process of union-management joint consultation on work-related issues. While we have made significant progress in reaching our goals through improved labour-management relations, we have yet to reach our final objective of an equal sharing of the responsibility in decision making in all. aspects of the hotels operations. Could these aspirations be too demanding of our people? Had the pace of our program for employee participation been too rapid? On the other hand, I believe that the success of activities like work excellence committees is built upon a momentum. Thus, i feel the need to press forward to the next level. This dilemma is a happy one in fact, because it arose as a consequence of our success.
  • Page 2 9A86C043 THE HOTEL Century Park Sheraton Singapore (CPSS), a 464-room, luxury hotel, decorated in classical English 19th century style, was officially opened in January 1979. It is a . 14-storey hotel situated on Nassim Hill, off Tanglin Road, on one end of the Orchard Road tourist belt. It was the first ANA-managed hotel I in Singapore. The hotel, situated on 11,500 square metres, offers the following facilities: Hubertus Grill, a western- style grill room; Unkai, a Japanese restaurant; a 250-seat coffee house and cafe terrace; a cocktail lounge; discotheque; a 180·seat function room; and a swimming pool. . Under the general manager and the resident manager are the departments of sales, purchasing, front office, accounts, food and beverage, personnel, engineering, housekeeping and security. (See Exhibit 1.) The maximum number of employees had been around 640, but by August 1985 the level had dropped to 504. The Chinese constituted the majority in the hotels workforce; Indians, Malays, and Eurasians made up the balance. A small number of expatriate personnel were also employed for their expertise. The General Manager and some chefs were German, while the Resident Manager, the Director of Food and Beverage, and the Executive Chef were Swiss. The CPSS, like the other hotels within the industry, provides on-the-job training in various functions. This was because the Singapore population had little experience in the hotel industry. While it was quite common for management personnel to have university or other professional qualifications, rank-and-file personnel were likely to have some secondary education or hold trade certificates. Because the education system offered instruction in the four official languages of the country, some hotel employees were more literate in Chinese, Malay or Tamil than in English. English, however, is the language used for official communication. A great number of CPSSs employees subscribe to the Food and Drinks Allied Workers Union, the union for the hotel industry. This union is affiliated to the national federation of unions. But the unions role has to be seen in the context of a country which prides itself on favourable labour-management relations and boasts a record of not having a strike since 1977. EARLY EFFORTS Mr. Chua, who had worked in the personnel function in both the shipbuilding and aircraft servicing industries, had joined the CPSS Hotel in 1979. Over the years, he witnessed the change in labour-management relations. Mr. Chua traced the sequence of events. This is a chain of hotels owned or managed by All Nippon Airways. 1
  • Page 3 9A86C043 We got off to a slow start. Before 1981, the labour-management characteristics in the hotel were more typical of traditional confrontational attitudes between labour and management. This impeded efforts at bringing about change to raise productivity. We wanted to increase productivity through restructuring jobs. This led to the formation of a nine-person joint union and management committee called the Job Enlargement and Enrichment Committee in May 1982. The original implementation of these changes was to have been around October of that year. Job restructuring, in effect, would mean a recombination of duties, or more shifts, e.g., the pool attendant, groundsmen and housemen, originally three jobs, were to become one. Cashiers were expected to manage the till at more than one location in the hotel. Despite reassurances that training would be provided and that there were to be no retrenchments, there was more talk than progress. I am proud of the fact that we began on the productivity effort . through human resources management even before the government launched its productivity movement. This is a nationally promoted effort to increase productivity consciousness in the Singapore workforce. By 1982, we had started both the quality circle and the work excellence programs. But I felt that we were making progress only after the labour contract was negotiated, and new union leaders were elected in that year. In retrospect, 1982 was a turning point. THE WORK EXCELLENCE PROGRAM The concept underlying the work excellence committee was first introduced to Singapore in 1981. It was believed that improved labour-management cooperation would result from regular consultation on work-related issues by committees comprised of labour and management representatives. This concept was the theme of the May Day seminar organized by the National Trade Union Congress (NTUC). The Shangri-la Hotel, which was the first hotel to embark on this program of labour-management cooperation, was heralded as the model for work excellence committees in the hotel industry. It was also at this seminar that the acronym WE committee (WE standing as much for "us" as for work excellence) was established. The adoption of WE committees in CPSS took place through a series of steps. Separate meetings at top management, departmental, and union levels were held through the months of July and August 1982 to discuss the feasibility of WE committees. When union and management met jointly, the meetings were
  • Page 4 9A86C043 conducted with the aid of an official from the National Productivity Board (NPB)? The consultant from NPB emphasized that his role would lessen progressively as improvements in labour-management cooperation were made. It was only after the preliminary groundwork was laid that a joint formal application was extended to the NPB to organize WE committees in the hotel. . An important part of installing WE activities was the training session organized for 27 persons from both union and management over a period of three days. Activities of the program included games in small group sessions to learn different methods of conflict resolution. One session resulted in both management and union recording two unflattering lists outlining their perceptions of each other. Union members perceived the management to be, among other things, sarcastic, high in flattery, autocratic; and making empty promises. On the other hand, management perceived the union leaders to be revengeful, insincere, and giving lip service. The discrepancy between the desired and actual state of affairs was the starting point for future improvements. Monthly WE meetings were to follow. Minutes for these meetings were recorded. The early meetings were concerned with the setting up of steering WE committees, and the drawing up of a "code of conduct." (See Exhibits 2 and 3.) Training of key personnel was completed by April 1983. Those leading in forming sectional WE committees were the security, accounting, housekeeping and laundry departments. Other departments seemed to Mr. Chua to be dragging their feet. SOME RESULTS By July 1983, the stalemated job enlargement exercise was brought under the umbrella of the WE program. Revised job descriptions, made possible by employees taking on a wider range of job duties, were submitted by departments. Progress was also seen in the widening range of topics discussed by the WE steering committee. By October 1983, the meeting agenda had moved beyond the problem of setting up WE committees to issues including incentive schemes, operational hours of the cafe, j.ob training, time cards for middle management, salary adjustments and second-tier wage adjustments (a merit scheme operating in Singapore). Because the NPB consultant felt that the meetings were proceeding well, he no longer attended meetings. CPSSs early efforts did not go unrecognized - it was one of the six recipients of the first Productivity Award given by NPB. (See Exhibit 4 for criteria.) This recognition was to foreshadow other improvements at the hotel. 2The National Productivity Board (NPB) is a statutory body charged with the responsibility of the implementation of productivity efforts. Among its activities were the conducting of extensive training courses for management and supervisors. It also promotes specific productivity programs like Quality Control Circles and joint labour-management consultation schemes like the work excellence committees.
  • Page 5 9A86C043 Dahak Ibrahim, chairman of the branch union at the hotel, noted at a national work excellence convention in mid-1984: Improvements in efficiency have not been confined to the hotel operation. Labour-management cooperation has also resulted in improved benefit and welfare schemes. Less time is spent on grievances - we used to have monthly grievance meetings. I have found our colleagues also more open and accepting of changes. At this same convention, it was reported that there were seven department WE committees, 21 sectional committees and 197 WE committee members in the Sheraton. Employee numbers had been decreasing even in years when the occupancy rates were increasing. In August 1985, the staff complement was down to 504 persons. Despite Mr. Chuas attempts to maintain a low profile on CPSSs productivity efforts, there was pressure to share their experiences through talks and conferences. As the word of their successes spread, CPSS also increasingly received visitors anxious to learn about the productivity movement. QUALITY CIRCLE ACTIVITIES The QC program was started in February 1982, at the suggestion of Mr. Zimmer, then Sheratons Resident Manager, upon his return from a seminar on quality circles organized by the Singapore National Employers Federation. Workshops were organized for QC facilitators and leaders. By August, Sheratons pilot circle, "The Searcher," was in operation in the Laundry department. After two months of activities, it made its first presentation to management as part of the activities for "Productivity Month." After this presentation, enthusiasm was high. Other circles formed were "The Adventurer" in Security, "Homemaker" in Housekeeping and "Improve the QCC" in the kitchen. However, by July 1983, Mr. Chua noted that attendance at QC steering committee meetings was falling off. By then the WE program was also in operation. CPSS also participated in other activities to support government-promoted programs. Among them was the "Use Your Hand Exercise" (see Exhibit 5), organized on a fortnightly basis from November 1983. Sheraton also took an active part in the "Courtesy Month," the "Productivity Month," and the "Save Water Campaign." There were other activities more specific to the hotel - the "Ken Fixit" program (a preventative maintenance program specifically for guest rooms), the Preventative Maintenance Program (with a more general focus on all equipment) and the Training and Rewriting Procedures Program (aimed at simplifying procedures and reducing the volume of paper work).
  • Page 6 9A86C043 Interest in QC activities continued to fall. One QC leaders meeting which was to have been held had to be cancelled due to poor response. The problem of low enthusiasm with QCs was discussed at WE meetings and the decision to continue activating interest in QCs was adopted. More QC leaders were trained in April 1984, and a QC workshop was organized to keep the QC effort alive. Meanwhile, Mr. Alex Kuenzli, a Swiss hotelier whose last posting was in Mauritius, had succeeded Mr. Zimmer as the Resident Manager. He commented in hindsight about QC activities. It would have been better if we had the organization structure first to support small group participation activities like quality circles. We started the QCs first, which was then followed by the work excellence committees. If-we had proceeded the other way around, it is likely that we could have sustained interest in QCs longer. SOME CONCERNS The Changing Hotel Industry While the late 1970s and the early 1980s saw an increasing number of tourist arrivals and optimistic predictions which led tothe overbuilding of new hotels, the tide was beginning to turn by 1984. A sense that the growth momentum was coming to a halt and that harder times were ahead was already prompting the management at CPSS, more experienced than other newcomers in the industry, to take steps to plan for the change. By mid-1985, their fears were becoming fact. Room occupancy at CPSS fell to an all-time low of 63 per cent, a drop from 80 per cent in 1984, and 75 per cent in 1983, and even poorer occupancy rates were forecast for the industry. In spite of the current uncertain economic situation and competition (which Mr. Kuenzli described as "like a jellyfish"), he had confidence that CPSS had a better chance than many others of surviving the recession. His hotel had adopted the policy of reducing manpower by attrition and of increasing productivity through the programs managed by Mr. Chua. The improved labour-management relations had enabled the hotel to function with less staff, but with no apparent drop in performance. Mr. Kuenzli noted with pride that the staff managed the increased occupancy in 1984 well, even though there were 100 fewer people to do more work. Mr. Kuenzli explained: The WE committees are now part of the solution to the current situation. We are hoping that the improved understanding of the employees achieved through our efforts in the last few years will help us meet the competition in further lowering costs and providing better service.
  • Page 7 9A86C043 No, I am not impatient at what appears to be long discussions over issues in these committees. I can sit through them as well as anybody else. The difference I see between Singapore and German labour- management cooperative efforts is probably one of degree of commitment. Issues discussed here in Singapore tend not to be as petty. And there is just that much more enthusiasm. We also try to keep employees informed about the hotels economic performance. This is done through briefing sessions which .I personally conduct, and which are specially scheduled for staff of different departments. All hotel employees are invited to attend. Sometimes members of the audience, not so fluent in English, may not exactly follow all I am saying, but.they appreciate the trouble I am taking. Afterwards, they may get an explanation from the others about what I have said. At the session for the general administrative staff held on July 18, 1985, Kuenzli started off the meeting by expressing his confidence that the CPSS would continue to succeed despite heavy competition (which he admitted was reaching a stage where even he was beginning to be somewhat apprehensive). He informed members present about a 14 to 15 per cent drop in occupancy rates for gazetted hotels. due to the decline in tourist arrivals. Charts of the hotels economic performance were presented, as were figures of the planned versus actual gross operating profits. Mr. Kuenzli emphasized that despite the cost savings of S$800,0004 as a result of declining staff strength, there was a shortfall from loss in the budgeted gross operating profit. He also mentioned the loss leaders in the hotel. Members at the meeting were briefed on the hotels latest efforts at boosting sales, and given an update on the opening of the new Sheraton Towers and its possible impact on the Century Park Sheraton. Though Sheraton Towers was positioned at the top end of the exclusive range in hotels, its room rates quoted during the opening period were competitive with Century Park Sheratons rates. Demands on middle management Mr. Chua, an unassuming man with an infectious enthusiasm, described the pressures on the management of the hotel in the implementation of a participative philosophy. JHotels which met the evaluation scheme for luxury. 4Cdn$480, 000.
  • PageS 9A86C043 We try to manage by example. It means that we are tough on keeping manpower costs down within our own departments. For example, the personnel department runs on a staff of three, including myself. We encourage our managers to pitch in whenever necessary. Mr. Moser, our Food and Beverage manager, will help to clear tables; Mr. Kuenzli set an example by even washing toilets - we have that on video! I am glad to see our management staff pitching in spontaneously. Ironically, an indirect measure of our success is perhaps reflected in the fact that it is becoming increasingly difficult to recruit management people from outside this hotel who can meet the demands of the job. People from within the ranks of this hotel seem better suited for management positions. We have tried quite recently to employ a few management personnel from other hotels, but found that these newcomers experienced some difficulties in adjusting to our organization. Our high expectations of management personnel make even our own employees feel somewhat apprehensive about accepting management positions within the hotel. Mr. Kuenzli echoed this view: I do not mind admitting that I am rather demanding of my managers, more so than of the rank-and-file. I expect each manager to work at labour-management cooperative efforts even if he meets with little enthusiasm from his department and feels discouraged about his attempts. FUTURE DIRECTIONS FOR LABOUR-MANAGEMENT RELATIONS Reflecting on the past few years, Mr. Chua wondered what steps he could take to ensure the continuing success of the programs and to move to a new level of commitment and involvement. There are increasing challenges ahead. I am a little apprehensive that some among us feel that we have arrived at labour- management efforts for the hotel. Winning the productivity award and having many people. interested in studying our success may have lulled us into thinking that all is well. We have to push forward in order not to fall behind. Besides, we must plan now to be ahead of the. competition in labour-management cooperation, which means that we should be pressing towards getting our employees involved in making decisions in the hotel. Are we ready for this next challenge?
  • Page 9 9A86C043 I also think our promotion of the WE committees detracted from the quality circle movement, when actually these activities should be complementary. Ideas for improvements can be generated by these circles, and then channelled through the WE committees. I would like to see a revival of interest in quality circles. While I appreciate the top managements acknowledgements of my efforts, I think it is not quite right that I should be needed to keep enthusiasm high for the program. I noticed upon my return after having been away for a few weeks last year that there was a slight falling off of activities in my absence. This should not be so. A truly successful program should be independent of particular individuals ... and that should also be part of our next objectives.
  • Page 10 9A86C043 Exhibit 1 SIMPLIFIED ORGANIZATION CHART SHOWING REPORTING RELATIONSHIPS ANA Hotels (Singapore) Ltd. I General Manager Resident Manager I I I I I I Sales Public Personnel Laundry Front Accounts Relations & Office Training Purchasing Security Engineer Executive Food & Housekeeping Beverage
  • Page 11 9A86C043 Exhibit 2 AN ABRIDGED VERSION OF THE CONSTITUTION FOR WORK EXCELLENCE COMMITTEESJ. CONSTITUTION FOR WORK EXCELLENCE COMMITTEES 1. Work Excellence Committee 1.1 It is a committee within an organisation, made up of management and employee representatives for joint consultation. Joint consultation, in its simplest form, is an arrangement to enable management and employee representatives to come together. to discuss work-related issues to improve the overall effectiveness of the organisation as well as the well-being of the workforce at the enterprise level. 2. Purpose of the Work Excellence Committee 2.1 The primary purpose of WE Committee is to build a harmonious labour- management climate within an organisation to achieve the organisational goals. 3. Objectives of the Work Excellence Committee 3.1 To create a congenial climate throughout the hotel. 3.2 To encourage labour and management to discuss and co-operate on work-related Issues. 3.3 To foster trust among all employees. 3.4 To instill a sense of pride, dedication and commitment to work. 3.5 To promote mutual respect, understanding and team spirit. 3.6 To involve employees in planning, problem solving and information sharing. 3.7 To promote teamwork and advise on small group activities, e.g., QC Circles in the hotel. 3.8 To provide employees with social, cultural and recreational programs. 4. Functions of Steering Committee 4.1 To advise other WE Committees and sub-committees. 4.2 To give guidelines and direction for other WE Committees to operate and function. 4.3 To have consultation between management and union employee representatives at the highest level. 4.4 To initiate the setting up of WE Committees in the whole organisation and co- ordinate their activities.
  • Page 12 9A86C043 Exhibit 2 (continued) 4.5 To monitor the progress of WE Committees and sub-committees. 4.6 To deal with whatever problems that may arise affecting the whole organisation. 4.7 To initiate programmes that affect the whole organisation. 4.8 To monitor the industrial relations climate in the whole organisation. 4.9 To explain to employees the rationale of policies and activities to the companies. 5. Composition of WE Steering Committee 5.1 The committee comprises of representatives from the management and labour, preferably with equal number from each side. 5.2 The management representatives are appointed by the General Manager while the Union representatives are appointed by the Union. 5.3 The Chairman shall be selected by the WECo The Chairman will appoint a designate who will chair in his absence. 5.4 The term of office of the Committee members shall be three full years. 6. Secretariat 7. Meetings 8. Duties and Responsibilities 9. Attendance by other persons10. Code of Behaviour11. Publicity12. Amendments to Constitution
  • Page 13 9A86C043 Exhibit 3 DIAGRAM 1: CENTURY PARK SHERATON SINGAPORE WORK EXCELLENCE ORGANISATIONAL STRUCTURE WE UNION STEERING (GENERAL MANAGER) REPRESENTATIVES •••• _ COMMITTEE RESIDENT MANAGER (8) (18) DEPARTMENT HEADS (9) SUPERVISORS (35) SECTIONAL WEC EMPLOYEES (.73) (92) KEY -I -----7 DIRECT INVOLVEMENT COMMUN .CAT ION FLOW FRAMEWORK OF ORGANISATION CHART
  • Page 14 9A86C043 Exhibit 4 NATIONAL PRODUCTIVITY AWARDS 1985The National Productivity Council will once again be considering nominations for the NationalProductivity Awards this year. The Awards, introduced in 1983, are presented annually toorganisations in recognition of their good productivity practices.The following guidelines are used in the selection of companies for the Award:• A companys training tradition or efforts to train and develop staff.• The state of labour-management relations in the company and the existence of cooperation mechanisms such as Work Excellence Committees.• A companys management philosophy which draws out the best in their people and includes respect for individual excellence within the context of teamwork as well as respect for work discipline.• The efforts put in by the company to enhance employees loyalty and identification with the company through various measures, e.g., company welfarism, promotion programmes such as 3Ps, in-house newsletters, etc.• Worker participation activities of the company, e.g., small group activities like QC Circles.• Good occupational safety and health record and work environment.• A companys efforts in quality and in mechanisation, automation, computerisation and other improvements in technology.Organisations interested in the Awards can write to or call Miss Judith Choo of the NationalProductivity Awards Secretariat, National Productivity Board, 55 Cuppage Road #08-16,Cuppage Centre, Singapore 0922, tel. 7345534 ext. 293.Published by NPBSingapore Productivity NewsJune 1985
  • Page 15 9A86C043 Exhibit 5 Helping Hands--------- Laundry Manager, Richard Kooi, Recently, a burst steam pipe in the receiving helping hands and brooms laundry department created a mini from colleagues when all pulled up crisis because it started to flood the sleeves and cuffs to help curb the basement. The situation called for flood. quick, decisive action and flood The water was bailed out in a little fighters. over 30 minutes. Q Personnel Director Chua Soon Lye; Laundry Manager, Richard Kooi and Front Office Manager, Sam Tay up to their knees in work. •
  • Richard Ivey School of BusinessThe University of Western Ontario IVEY 9B06M083ING INSURANCE ASIA/PACIFICAndreas Schotter wrote this case under the supervision of Professors Rod White and Paul Beamish solely to provide material forclass discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. Theauthors may have disguised certain names and other identifying information to protect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction ofthis material is not covered under authorization by any reproduction rights organization. To order copies or request permission toreproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University ofWestern Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright © 2006, Ivey Management Services Version: (A) 2006-09-14In June 2003, Jacques Kemp, newly appointed chief executive officer (CEO) of ING InsuranceAsialPacific (ING AlP) was reviewing the regional operating structure, performance, and growth strategy.After arriving in Asia in July 2002 as regional general manager, Kemp traveled extensively throughout theregion, in order to gain many insights into the existing ING AlP organization, the individual business units(countries) and their. strategies. He also solicited ideas from major consulting firms on how to furtherstrengthen ING AlP. The company was doing well, but he felt that lNGs existing market position; strategyand operations in AsialPacific could be enhanced.Kemp was concerned that ING needed to prepare for the time when the general market growth in Asiaslowed and the competitive pressure intensified. He also was determined to make a difference during histenure as lNGs AsialPacific chief executive officer and to take the company to the next level.INTERNATIONAL NETHERLANDS GROUP (ING)ING was a global financial services company of Dutch origin, with more than 150 years of history. Thecompany provided an array of banking; insurance and asset management services in more than 50countries. With over 120,000 employees, ING served a broad customer base, including individuals,families, small businesses, large corporations, institutions and governments. Based on marketcapitalization, LNG was one of the 20 largest financial institutions globally and ranked in the top lOinEurope. The company was organized along six major business lines, which included both regions andproduct groups. While the banking business was divided into wholesale, retail and direct banking with aglobal management structure, the insurance business was organized into three regional business lines,including the Americas, Europe and AsialPacific (see Exhibit 1).
  • Page 2 9B06M083JACQUES KEMPJacques Kemp started his career on the banking side ofING in 1974, in risk management at a local officein the Netherlands, and later moved to the foreign division at the head offices in Amsterdam. He wasinvolved in setting up the ING Los Angeles office in 1982, and from 1984 to 1990, he was generalmanager in Brazil. In 1990, he returned to Amsterdam to take a general manager position, and one yearlater, became chairman of ING Bank International. One of his main achievements was the set-up of theemerging market banking network. After the merger and integration with Barings Bank in the mid-1990s,he became a member of the executive committee with responsibility for lNGs general banking activitiesand the international banking network worldwide. In 2000, Kemp became Global Head of e-Business forING Group, and was responsible for initiating and coordinating lNGs strategy on Web-enabling,integrated financial services on a global basis. He joined the executive committee of ING InsuranceAsialPacific in July 2002 and became CEO for AsialPacific on April 1,2003.THE INSURANCE INDUSTRY IN ASIAThe insurance industry in Asia was expected to expand dramatically, driven by rapid economic growth anda general increase in the popularity of insurance products, resulting from rising incomes. Gradualderegulation and the opening up of the Asian insurance markets were making them increasingly accessibleto foreign insurers.The proportion of gross domestic product (GDP) accounted for by life insurance premiums in Asia wasrelatively high when measured against income levels. The demand for life insurance in Asian markets wasgreater than in other countries at a comparable stage of development. Japan and South Korea, in fact,displayed the second- and third-highest degrees of insurance penetration in the world.There were several reasons for the popularity of life insurance in Asia. Life insurance (like every otherform of saving) profited from the high rates of saving in Asia. In this respect, insurers in some Asiancountries had stolen the march on the banks by intensively marketing whole life policies. 1 Further, in mostAsian nations, state or company pensions were modest, and private insurance products filled the gap. Lifeinsurance enjoyed slight tax advantages in most Asian countries. Premium volume in Asia (excludingJapan) was expected to experience real growth of more than 10 per cent per year between 2003 and 2008.Global premium volume was expected to increase by about four per cent during the same period.At the end of 2002, approximately 900 insurance companies (about 265 of them foreign) were operating in 12 Asian insurance markets. The size of the companies, their capital assets and the share of the market inforeign hands varied considerably from country to country. Regulations on the part of the supervisorybodies also had highly varying effects on market activities. The liberal regulations of Hong Kong ensuredadherence only to minimum capital regulations, while the additional (and in some cases far-reaching)regulations of other countries covered the licensing of companies, products and prices. However, underpressure from the World Trade Organization (WTO), these Asian markets were expected to become moreopen.1 Unlike term insurance which only paid out when the principal died (or was disabled); whole life policies had an insurancecomponent and a savings component.
  • Page 3 9B06M083ING IN ASIA/PACIFICING Insurance AsialPacific was responsible for the life insurance operations and asset/wealth managementactivities of ING throughout Asia Pacific. ING was the first European company to enter the life insurancemarkets of Japan, Taiwan and South Korea. By the beginning of2003, ING was ranked among the top fiveforeign financial services providers in AsialPacific with more than six million clients. The portfolioconsisted of large businesses across six mature markets -AustralialNew Zealand, Taiwan, Malaysia,Hong Kong, Japan and Korea - some smaller, semi-mature markets, such as the Philippines andSingapore, as well as newly emerging life insurance markets, including China, India, Indonesia andThailand.ING Insurance AsialPacifics business units offered various types of life insurance, wealth management,retail and institutional asset management products (including annuity, endowment, disability/morbidityinsurance, unit linked/universal life, whole life, participating life, group life, accident and health, term lifeand employee benefits) and services (see Exhibits 2 and 3). In Hong Kong and Malaysia, non-lifeinsurance products (including employees compensation, medical, motor, fire, marine, personal accidentand general liability) were also offered. ING Asia/Pacifics distribution channels included tied or careeragents, independent agents, financial planners, bancassurance. telemarketing and e-business channels. Inseveral countries, ING had strategic alliances with local companies to enhance distribution capacity.In 2002, several regional shared service centers were established to lower operating costs. With 60,000points of distribution in Asia, ranging from tied agents, independent agents and brokers/dealers to banks,lNGs strategy was able to access its clients through the channel of their choice.ING had leading positions in Australia, Taiwan, Korea and Malaysia, and it was a fast-growing nicheplayer in Japan. In New Zealand, ING managed about 16 per cent of all mutual funds, making it thenumber-three player in terms of assets under management. ING was well positioned in the two largestAsian growth markets, China and India. It had two joint venture operations in life insurance in China and a44 per cent stake in ING Vysya Bank, Indias fifth largest private bank, as well as a life insurance jointventure and a mutual funds business.ING was doing well in Asia Pacific (see Exhibit 4). Although 2002 was marked by continuing declines inglobal equity markets, the aggregate financial results of ING AsialPacific showed robustness against thismarket volatility. ING AsialPacifics regional results exceeded its financial expectations for the year withthe businesses in Australia, Japan and Korea delivering the most outstanding results.THE AETNA INTEGRATIONBy 2003, the integration of Aetna, a major acquisition undertaken during 2000, was accomplished, andrebranding was completed in almost all countries. This challenging integration was the major achievementof Kemps predecessor.ING Group acquired the life insurance activities of American-based Aetna International, which at the timehad a much stronger position and an insurance organization that was four times larger in Asia than ING.The integration caused the departure of many of Aetnas top managers but there were also examples ofnon-disruptive transitions, such as the one in Hong Kong, where the local general manager of Aetnaembraced the opportunities provided by the merger and led the local joint operation to become the most2 Bancassurance is a French term referring to the selling of insurance through a banks established distribution channels.
  • Page 4 9B06M083recognized foreign financial services provider in Hong Kong. Overall, the business remained strong, andING AsialPacific benefited substantially from the Aetna acquisition. The merger helped ING became oneof the largest life insurance companies in Asia-Pacific.To rebalance the portfolio, ING sold its life and non-life operations in the Philippines, Singapore andIndonesia. ING felt these three countries would not produce enough "substance" in premiums to allowforeign insurance companies to make decent returns and profits, and the business units in these countrieswould need huge amounts of resources to manage these markets properly and to meet INGs standards ofrisk and compliance. Strategically ING decided that it had enough substance and growth potential in theother 12 Asian countries in which it operated while retaining the asset management operations in thePhilippines and Singapore.REGIONAL STRUCTUREING AlPs activities were organized by business units (countries). The regional office in Hong Kongfulfilled the role as monitoring center. The regional goal was to be a top player in the key markets ofAustralia, Hong Kong, Japan, Korea, Malaysia and Taiwan, while further developing the major growthmarkets of China and India. What this goal meant and how it could be achieved was left largely to the localcountry business units.Individual business units (countries) had a relatively high level of autonomy. This culture created a veryentrepreneurial environment, but also some frictions between the regional office in Hong Kong and thecountry business units. The functional managers at the regional office had difficulties maintaining commonstandards across the region, As one regional office manager stated: All business units have different ideas, standards and priorities. It is hard to keep track of activities, especially since the business unit managers only report to the regional managers and not to us, who are supposed to be in charge for the coordination of the operational activities.The region was divided into four country clusters, each under the nominal supervision of either one of tworegional general managers or one of two executive members who then reported to the regional CEO (seeExhibit 5). The regional CEO reported directly to the chairman of the executive committee. The regionaloffice had several regional office professionals reporting to the chief of staff, including actuarial staff, thecontroller, as well as professionals engaged in the areas of legal issues, compliance issues, informationtechnology (IT), investment product development, human resources (HR) , E-business, security andfinance. The chief of staff, the executive members and the regional managers were part of the regionalmanagement committee. The regional functional department managers did not have direct responsibilityfor their respective counterparts within each business unit. For example, the IT manager in Thailandreported to the Thailand country manager, not to the regional IT manager. The regional IT managerreceived information from the country manager by request.The individual business units varied greatly in terms of their internal organizational characteristics andoperating styles. Some business units, like Taiwan, Japan and Hong Kong, were organized along productlines. Other business units were organized as "do it alls," such as Australia, which marketed itself as a totalfinancial solution provider. In each country, the local management followed their own instincts. There wasno corporate-wide approach. By and large the units were successful, and the potential benefits of a morecommon approach were rarely explored.
  • PageS 9B06M083KEMPS SIZE-UPAlthough the latest results had been solid and ING Insurance AsiaJPacific appeared to be doing well,something bothered Kemp. During off-site meetings, where the senior line and functional managers of theregional office and the local business units discussed, what could be improved to get to better performance,Kemp received clear calls for better coordination between the regional office and the individual businessunits. The executives asked specifically for more aligned plans and procedures, improved communication,and more delegated authority (see Exhibit 6). There was a clear belief that a detailed roadmap was neededto get things done. Kemp pondered: Would it be an operating model, a business model, or a process framework and whatever the name, where can I find it. Could the head office provide me with one; or perhaps I should try to involve consulting firms?Regional reports were characterized by a multitude of different formats, which made comparisons difficult.Functional heads at the regional office spent several days each month preparing consolidated presentations.Business unit managers defined their own performance benchmarks and agendas for regional meetings. Asthe chief of staff recalled: Sometimes it appears that we speak totally different languages and that nobody understands one another. This is frustrating for us at the regional office and I believe that this is the reason why the business unit managers do not really buy into ideas proposed by the regional offices functional groups.Kemp sensed the difficulties with, the existing level of organizational heterogeneity. Strategic objectiveswere set according to business unit preferences and they were not formally aligned with regional strategy.Pay for performance was difficult to implement, since results were reported in local formats and notmeasured against group benchmarks. Local marketing campaigns did not always reflect existing corporateidentity standards. In fact, many business unit managers did not even know the current corporate standards.Each country had its own ideas where the best business opportunities could be found, and thought its ownmarket was special. Consequently, it was difficult to identify commonalities across the region. As Kemprecalled from some of the feedback that he received during his initial tour of the region: There are no clear mission statements, despite that every country wants to be the leader in something. For example India wants to be the leaderin asset management but without presenting a clear plan, outlining how to get there with for example acquisition, organic growth or through partnerships and what this means for the organization, marketing and so on.Another problem was the ambiguity in terms of the roles of the managers at the regional office. Themanagers knew their titles but nobody was really clear how the roles, tied into the operational structure.During the last couple of months, Kemp heard many times the question: "What is the actual function of theregional office?" This issue caused frustration especially with the functional managers at the regionaloffice who felt disconnected from the operations ofthe business units.As Kemp observed:
  • Page 6 9B06M083 Strategic actions are mainly characterized by reactions and less by planning. As the new CEO I have to handle all kinds of strategic plans for the various business units, most are different, inconsistent, incomplete, not aligned with the overall goals of lNG, and short of details and specifics,. I am therefore wondering what is the "better" way for getting from strategy to execution. I have checked the literature, I checked with consultants and my own study papers and I have not come across any solid and pragmatic operating model or framework for getting close to what I think we need. THE CONSULTANTS Kemp exchanged ideas with several top international consulting firms, including McKinsey & Company,. Monitor, and BostonConsuiting Group (BCG) about ING Insurance AsialPacifics situation. The inputs were initial overviews and not detailed analyses, but Kemp wanted to get a feeling for the thought processes of these firms and whether it would be worthwhile to engage one of them for follow-on work. Each firm identified different key issues (see Exhibit 7). McKinsey & Company identified strategic portfolio management and pro-active human resource management as the key areas for improvement. Kemp could see the importance of these issues but he noted the lack of marketing and operational recommendations. For him, the proposal did not get to the day- to-day operational issues. He did not see how a different approach to HR management could solve the operational issues that he had already identified. He believed that ING Insurance AsialPacific had a great talent pool and that HR management could not be the only key driver for further improvement. Monitor Group, on the other side, focused on branding as the key driver for improvements in all areas, including, finance, HR, sales, marketing, manufacturing and operations, distribution and research and development (R&D). Kemp was aware of the importance of branding, which, in fact, was a core strength of ING globally. However, he did not think that branding could or should overwhelm the other key drivers for success.BCGs proposal focused on building professional capabilities and identified six functional categories inwhich capabilities should be improved or developed. These categories included strategy and businessplanning, sales and distribution, products and marketing, finance management, operational processes andinfrastructure, and human resources and organization. Kemp liked the approach of BCG but he still notedthe lack the important issue of reputation management and compliance. Like the other consulting firms,BCG applied a generic framework to ING. Kemp still thought that the solution was detached from INGInsurance AsialPacifics specific operational issues. After all, the company was doing well, so ifhe starteda change process, he needed the full support of his team; and the consultants proposals, though interesting,did not provide a clear pathway for involving ING Insurance AsialPacifics managers.Kemp summarized: Even if BCG gets the closest, the model lacks completeness and comprehensiveness (specific operational drivers). It is also incomplete in that it does not follow through with clear "objectives and key performance measures." For me it comes to the question how to . get from strategy to execution, especially in an aligned way and how to list and connect all the "dots" needed to build (and keep building) a "lasting" and efficient organization. Most models talk about it but do not give me a framework to connect the "dots" with tools like
  • Page 7 9B06M083 for example pay-for-performance, knowledge-management, intra-firm communication, or planning and auditing.Another problem for Kemp was the regular disconnect between the functional managers at the regionaloffice and the business unit managers in the countries. He believed this lack of coherence createdinefficiencies and potential vulnerability for the entire organization.Over the years, Kemp had always been interested in the management literature. He met many of the topstrategists in .industry and academia at conventions and seminars. He particularly liked the idea of"managing managers," which to him was a key gap in the existing management literature. He thoughtleaders should build organizational capabilities and the internal discipline to help everyone in theorganization to excel. He did not want to add complexity, a pitfall he believed many leaders fell into whenrestructuring organizations. He believed that strategy, and strategic thinking, while important, could onlybe as good as its implementation,Kemp had always felt inspired by Alfred Sloans restructuring success of General Motors in the 1920s and1930s. When Sloan took over GM, he inherited an amalgamation of independent, entrepreneurialcompanies assembled by his predecessor, William Durant. Sloan saw that the strategies of the businessescould be made more coherent and that the entire organization could be more efficient by building systemsto manage the managers. At the time, Sloans approach was revolutionary.Kemp pondered over the consultants proposals and his own ideas and he wondered how to create acoherent strategy, which could be executed by the entire organization. He was determined to present hisconcept at the next executive committee meeting in two weeks time but he had to decide where to focus(see Exhibit 8).
  • Page8 9B06M083 Exhibit 1 ING GLOBAL BUSINESS LINES AND SHARES I Supervisory Board I I Executive Board I I I I I I I Insurance Insurance Insurance Wholesale Retail ING Direct Americas Europe Asia/Pacific Banking Banking ING Direct 7% Insurance Europe 22% Retail Banking 20% Wholesale Banking 24% Insurance Asia/Pacific 5%Source: ING AsiaIPacific
  • ) Page 9 9B06M083 Exhibit 2 ING ASIA/PACIFIC INSURANCE PRODUCT OFFERINGS Whole Critical United Linkedl Variable General Group Country Term Endowment Health Life Illness Universal Life Annuity Insurance Insurance Australia 0 x x x 0 0 x 0 0 China.PALlC 0 0 0 0 0 0 x )( 0 China.ICLlC2 0 0 0 0 0 0 x )( 0 Hong Kong 0 0 0 0 0 ,0 x 0 0 India 0 0 0 x 0 0 x x 0 Japan 0 0 0 0 0 x 0 x 0 ING Life Korea 0 x 0 0 0 0 0 )( 0 KB Life Korea )( x x x x 0 x x 0 Malaysia 0 0 0 0 0 0 x 0 0 New Zealand 0 x )( 0 0 0 x )( x Taiwan 0 0 0 0 0 0 0 0 0 Thailand 0 0 0 0 0 x. x )( 0 Indonesia 0 0 0 0 0 0 )( 0 0 Singapore x x x 0 x x x 0 x The x x x x 0 0 [if 0 0 PhiliDDines Notes: Group insurance covers aI/ types of products. Education plans are considered as endowment plans. Universal Life products are offered in Korea and China. Hong Kong offers both universal life and unit linked products. In Taiwan, General insurance only includes travel insurance products. ING does not currently have insurance operations in Singapore, Indonesia or the Philippines. Source: ING AsialPacific 1 50/50 joint venture operations in life insurance with Pacific Antai Life (PALlC) in Shanghai. 250/50 joint venture operations in life insurance with Beijing Capital Group in the northern city of Dalian. The new joint venture was known as ING Capital Life Insurance Company Ltd (ICLlC).
  • Page 10 9B06M083 Exhibit 3 ASSET MANAGEMENT PRODUCT OFFERINGS Business Unit Product Offerings Australia Australian equities and fixed income, Diversified (balanced) funds, International equities & fixed Income, Multi-manager (Optimix), Private equity, Global property securities and Global hiQh dividend China Equity funds, Balanced funds and Bond funds Hong Kong Asian equities, Hong Kong equities & fixed income, Asian & Emerging Market debt, Proprietary equities and fixed income India Equity funds, Balanced funds and Bond funds Japan Japanese bonds and equities, International bonds and equities and Balanced funds Korea Domestic Korean bonds and equities, Offshore funds and Balanced funds Malaysia Proprietary domestic equities & fixed income, Unit-linked insurance investment products, Discretionary investment mandates, Corporate / residential mortgage loans and Domestic real estate New Zealand Domestic and International fixed income and equities Philippines Balanced funds, Advisory services, Peso fixed income, Domestic equities, Philippines USD bonds, Deposits, Securities and structured product offerings Singapore Offshore mutual funds, Singapore $ bond funds, ASEAN equity funds, Institutional discretionary mandates Taiwan Domestic Taiwanese equities, fixed income & balanced investments, Localized versions oflNG global products, Discretionary account management and Offshore funds of various labels Thailand Mutual funds, Property funds, Real estate investment trusts, Private funds and Provident funds Indonesia ING Investment Management AlP does not have asset management business in IndonesiaSource: ING Asia Pacific
  • Page 11 9B06M083 Exhibit 4 ING ASIA/PACIFIC FINANCIAL OVERVIEW Figures in Euro million 2002 2001 Change Premium Income 7,798 6,497 20% Annual Premium Equivalent 1,283 1,395 -8% Underlying Profit before Tax 324 281 15% Value of New Life Business 280 247 13% Internal Rate of Return 15.4% 14.9% 3% Assets under Management 37.3 25.6 46% (€ billion)Source: ING Asia/Pacific
  • Page 12 9B06M083 Exhibit 5 ING ASIA/PACIFIC ORGANIZATION CHART PRIOR TO APRIL 2003 EXECUTIVE COMMITTEE Chairman Executive 1 Executive 2 I Regional CEO " I I I I I I EC Member" I -1 EC Member" r1 General Manager •• r1 General Manager" I I Chief of Staff ,. Executive Japan I Taiwan (Country Manager) Korea Life - Executive H Australia (Country Manager) I ING Life - Life - Executive ""- HCB - Executive Re,glonal Office Professionals Actuarial (Country Manager) Executive Aetna Heiwa Life Funds - Executive Cards - Executive Indonesia Life/MedicalNon Life H Malaysia (Country Manager) I - Executive CFO Executive ING Principal Pensions Hong Kong (Country Manager) (Country Manager) y India (Country Manager) I Executive Controiler Executive ING Funds •...... Life - Executive Pensions - Executive ---f Thailand (Country Manaqer) Executive Executive Non Life - Executive Legal Executive China ---f Philippines (Country Manager) - Sonja Key (Country Manager) Compliance -- PALIC (Shanghai JV) Executive Executive IT Executive Executive Investment Products Executive HR/MD Note Executive E-Business Executive Security - TBA Source: iNG Asia-Pacific
  • Page 13 9B06M083 Exhibit 6 JACQUES KEMPS KEY ISSUES Sounds familiar. .... ? Question: HOW??Source: ING AsiaiPacific
  • Page 14 9B06M083 Exhibit 7 THE CONSULTING PROPOSALS The Problem: Consultants Have Their Own Ideas ><. I! $W K" r- ,,;; t"w"~ ·ll.;~""4,N.p:....f~;nW c;» r;.1JUHm ·"1O;:t!"l{;;;f#:l.i.CI:.;.l::ttJfJf~ ~~; ~-if¥"~ ~~ 1," CD -~ -.~ ca • Focus on business portfolio • Branding is the driving force for • BeG: 6 functional categories, in management all processes which capabilities should be • Human resources seen as built fundamental Issue: Issue: Issue: Vital tunctions such es Bmm:!!ng snouk! II(~ considered Rep!lmtfotl m:magement marketillg ,"IIld operations ere In most prccesse«, but not as (if/elm/illY COmpifAI1Cei Is stiff mfssil19! tile dnver of eve! vthfHr;( mft;sfllg! 7 ING
  • Page 15 9B06M083 EXHIBIT 8 THE PROBLEM How to apply the Theory while faced with more and more Issues? mentation ~ iIIIiI ObJec- -f Plannln,,! ~ tives& .KPlsSource: ING AsiaiPacific
  • Richard Ivey School of BusinessThe University of Western Ontario IVEY 9B09M028SCANDINAVIAN AIRLINES: THE GREEN ENGINE DECISIONJennifer Lynes wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effectiveor ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information toprotect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction ofthis material is not covered under authorization by any reproduction rights organization. To order copies or request permission toreproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University ofWestern Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright © 2009, Ivey Management Services Version: (A) 2009-06-11INTRODUCTIONIn the spring of 1995, the five members of the senior management team of Scandinavian Airlines (SAS)were sitting around the boardroom table listening to Bengt-Olov Nas, SAS s director of aircraft and engineanalysis. Senior management were discussing the decision to update the airlines fleet, and Nas had justfinished introducing his specification wish-list for the new fleet of 55 Boeing-737s that SAS was about topurchase.The decision to add or remove aircraft from a fleet is one of the most important to be made within anairline because of both the significant cost of replacement and the long-term consequences that result fromthe choice of aircraft. An average fleet would last an airline between 25 and 35 years. The environmentalperformance of an airline is also strongly related to the age and makeup of its fleet. The type of aircraft anairline chooses to purchase has to serve the airline in the regulatory, market and technologicalenvironments predicted to exist within the life of the fleet. As one can imagine, the decision for SAS wascomplex and involved analysis, prediction and perhaps even a gamble to come up with an aircraft fleetmost suited to the coming needs of the airline. Nas and his team of aircraft analysts had spent several yearsresearching the type of aircraft SAS needed for its new fleet.Unlike cars, the body and engine of large commercial aircraft does not come as one unit. Generally, anairline chooses the aircraft body from one manufacturer and the engine from another. For SAS, while thedecision to buy the Boeing 737 model had already been made, the airline had yet to decide on an engine.After much discussion with aircraft and engine manufacturers, Nas had come up with an option for SAS topurchase a "green" engine for its new fleet of Boeing-737s. This two-stage.dual annular combustor (DAC)engine produced significantly lower NO, emissions and would represent a strong commitment to the futureenvironmental improvement of the airline. However, the DA~ engines -added kr3.5 million I per aircraftonto the total cost of the new aircraft fleet (which was estimated to be krI2 billion). At the time of themeeting, Nas could not provide specific figures on the economic payback of these engines. Forecastersanticipated increased emissions charges and taxes for the European airline industry, however, the future 1 kr:;: Swedish Kronor. At time of print, approximately kr7=CDN$1; kr9=US$1; kr11.5=€1.
  • Page 2 9B09M028regulatory structure of the industry was too uncertain to make any clear predictions. Nas was presentingthis idea largely on intuition that purchasing these engines would have positive financial payback for SAS,as it minimized the risk of future operational limitations.Nas had only one meeting to convince the management team to. approve the procurement of the proposedDAC engines for the new Boeing-737s.THE AIRLINE INDUSTRYThe airline industry has played a key role in shaping modem society. With 1.6 billion passengers using airtransport each year worldwide, the airline industry has facilitated globalization, both in economic andsocial terms. Passengers are traveling more frequently and for longer distances than ever before. Low-costairlines have also increased the proportion of people that could afford to fly.On a global scale, the airline industry has experienced almost continual growth in passenger numbers. Overthe past 50 years the commercial airline industry has almost consistently sustained positive rates of growth.The industry had gone through significant changes in recent times, including deregulation and increasedsecurity concerns.Airline Industry TrendsThe 1980s were a period of prosperity for the airline industry, however, in the 1990s things started tochange when the industry began to deregulate. In mid-2001, the industry began experiencing an economicdownturn that was further fuelled by the terrorist attacks of September 11, the SARS2 outbreak in Asia in2003 and political unrest in the Middle East. The companies that had kept or increased market share duringthese turbulent times have been those that have best been able to adapt to these challenges.Liberalization of the skies has allowed more airlines to fly to airports that were previously restricted to anations flag carrier. These changes have contributed to the growth of airline travel (by making it lessexpensive for the passenger) but have also increased competition between carriers. Moreover, particularlyin Europe, airlines do not only compete with other airlines but also with other forms of transportation -especially the high-speed railway networks. The past decade has seen a large increase in the number or"low-cost air carriers. These low-cost airlines have forced major national and international carriers tochange the way they operated.To remain in business, many airlines have tried to improve competitiveness through increased efficiency.The resultant strategic realignment and search for resource efficiency has resulted in a consolidation ofdomestic carriers, as well as a movement towards the development of international alliances. Thesealliances allow airlines to share flights and also to optimize connections between international flights.2SARS: severe acute respiratory syndrome.3lATA (International Air Transport Association), "Urgent to get out of financial abyss, n April 8 press release detailing theopening address by lATA director general and CEO Pierre J. Jeanniot to the Airline Financial Summit, New York, April 8,2002.
  • Page 3 9B09M028The Major Environmental Concerns in the Airline IndustryIt is estimated that 90 per cent of an airlines environmental impact comes from its flight operations (e.g.fuel consumption, air and noise emissions), five per cent from cabin operations (c.g. meal service andcleaning the aircraft cabin) and five per cent from ground operations (e.g. aircraft maintenance andoperation of vehicles on the ground)." Although the rate of CO2 and NO, emissions from aircraft arecomparable to other forms of transport such as road and rail, studies have shown that the impact of theemissions from aircraft at high altitudes are thought to have a global warming effect three times greaterthan on the ground. While there have been significant improvements in aircraft technology over the pastfew decades, the sheer growth in airline travel makes it difficult for the industry to reduce overall aircraftemission levels.Increasingly, pressure has been mounting from governing structures, such as the European Union, for theairline industry to respond to environmental challenges - particularly in the areas of noise and emissions.Growing public awareness of the environment has further encouraged airlines and airports to address theseIssues.Greenhouse gases are an unavoidable part of airline operations. It is a major challenge to seek solutions tominimize aviations climate impact. Although aviation contributes approximately three per cent to globalemissions of carbon dioxide, international flights are currently exempt from the Kyoto Protocol. Thealtitude and distance aircraft travel make it difficultfor emissions from international flights to be attributedto a specific geo-political boundary. Airlines are also unique from other sectors in that they are usuallybased out of one country but operate "cross-nationally" in the sense that they might fly to many countries.Airlines are therefore subject to the regulatory structure of their home base as well as that of each countryto which they fly.Environmental Policy and Regulation for Airlines in SwedenThe regulatory milieu of commercial aviation is complex. In general, the airline industry is governed by acombination of international, federal, regional and local legislation. Although the majority of control hastraditionally been at the federal and international level, local governments have been granted increasedpower in recent years, and many airports have now been privatized. Commercial air transport remainshighly regulated with respect to air traffic control, airspace, safety and security. Internationalenvironmental standards regarding air and noise emissions have been developed by the United NationsInternational Civil Aviation Organization. Exhibit 1 outlines the major environmental impacts ofcommercial air travel. The International Air Transportation. Association (lATA), the industry body of the international commercial aviation industry, has recognized the environinent as a key consideration for the industry by publishing a report for the airline industry that discusses the impacts, the tools being used to improve environmental performance and the challenges facing the industry (lATA, 2000). More recently, it has.created five management positions that focus on the environmental management and performance of the industry.4 SAS Environment Report. 2000.5 J. Penner, D. Lister, D. Griggs. D. Dokken and M. McFarland (eds), "Summary for Policy-Makers: Aviation and the GlobalAtmosphere. A Special Report of IPCC Working Groups.I and 11/in Collaboration with the Scientific Assessment Panel tothe Montreal Protocol on Substances that Deplete the Ozone Layer. n Intergovernmental Panel on Climate Change (IPCC).Cambridge University Press. Cambridge, 1999.
  • Page 4 9B09M028The government body that deals with aviation in Sweden is "Luftfartsverket," which translates in Englishto the "Swedish Civil Aviation Administration" (Swedish CAA). The Swedish CAA is the governments"expert" in aviation and has the responsibility of ensuring that Swedens interests in aviation are fulfilledon a national and international level. Sweden is a leader in management of environmental impacts relatedto air travel and is one of only two countries (Switzerland being the other) to favour charges in aviation asa tool for encouraging airlines to improve their environmental performance. The Swedish CAA argues thatcharges and taxes are an effective way to get airlines to use the best available technology.The largest airport in Sweden, Stockholm-Arlanda, uses charges and taxes as a mechanism to reduce noiseand fuel emissions. It has even implemented a cap on NOx and CO2 emissions - meaning that once NOxor CO2 emissions reach a certain level, the airport will not allow an increase in traffic flow. This was one ofthe conditions that formed part of an agreement to allow the airport to build a new runway in the 1990s. AsSASs main hub is Stockholms Arlanda airport, this is a significant factor affecting SASs day-to-dayoperations.BACKGROUND OF SAS - THE COMPANYWalking into the headquarters of SAS in Frosundavik, a suburb of Stockholm, there was a feeling of bothserenity and efficiency. Passive solar light and ergonomic furniture were key ingredients to each office.Equality of employees, a fundamental component of Swedish culture, was visibly present; for instance, theoffice of the deputy CEO did not look much different than that of a middle manager.Scandinavian Airlines (SAS) was the largest airline in Scandinavia and had bases in Stockholm, Denmarkand Oslo, serving 32 million passengers per year on domestic, inter-Scandinavian, European andIntercontinental routes. The airline was part of the larger SAS Group, which included. hotels, other airlinesas well as airline support services. The holding company, SAS Group, was 50 per cent state-owned(Sweden 21.4 per cent, Norway 14.3 per cent, Denmark 14.3 per cent), with the remaining 50 per centbeing publicly traded. SAS Group was Europes fourth largest airline group, demonstrating that it was animportant player in the global airline market.The airline had a reputation in the commercial aviation industry for being forward-thinking and hadpioneered such steps as being the first major Western airline to have a female pilot (1969), to offerbusiness class on board its flights (1981) and to have its environmental report audited and verified by athird party (1996). The companys management realized that key issues involved in developing polices,strategies and decision-making were cost reduction, the companys image as well as the ability toanticipate market and regulatory changes and be able to plan ahead of time.The Evolution of Corporate Greening at SASIn 1995, environmental management was elevated to a strategic level at SAS. The environment hadbecome part of the overall policy-making structure for SAS, evident through the establishment ofenvironmental visions and goals and a commitment to publish environmental reports on an annual basis(SAS, 1996). At the forefront of this strategic change was the then-president and CEO, Jan Stenberg.In 1995, Stenberg appointed SASs first environmental director, Niels Eirik Nertun, who, since then, hadbeen an influential player in the role that environmental management had taken in decision-making withinSAS. Once in the position as environmental director, Nertun was able to justify the expense of developingen,:ironmental initiatives such as reporting mechanisms by arguing to upper management that competitors
  • Page 5 9B09M028such as British Airways were reacting to environmental pressures and big (corporate) customers weredemanding it. A look through SASsEnvironmental Reports from 1995 onwards showed the rapidevolution of SASs environmental programs.Despite the economic downturn of the industry in 2001, the CEO announced in the 2001 EnvironmentalReport that SASs commitment to the environment would remain firm. Since then, however, the .environmental department of SAS had faced cutbacks in economy and staff - albeit no more than otherdepartments within the airline. This had resulted in a reduction of staff from four to two people workingdirectly on environmental issues and an environmental report that, instead of being a separate report (as itwas for seven years), was now integrated into the overall annual report for SAS.Exhibit 2 shows a time line of significant events in relation to corporate greening at SAS, including awardsit had received for its environmental reports, changes in the companys leadership and the evolution of itscorporate environmental policies.Environmental Management at SASSAS had been identified as a leader in environmental commitment by its suppliers and other airlines aswell as by representatives of international organizations such as the Air Transport Action Group andIATA.6 SAS was committed to implementing sound environmental management practices that ensuredminimal environmental impacts, adopting best available technologies as well as commitment to continualimprovement and promoting awareness of environment-related aspects of the industry to external parties.The former CEO of SAS, Jan Stenberg, expressed that the reasons behind this commitment were not solelyidealistic reasons: We believe that companies which have an impact on the environment and ignore their responsibility will disappear from the market within a decade ... A sound environmental profile is profitable. But it is more that that. It is our contribution to a sustainable society and to future generations. .SAS stated in its environmental reports that what was driving it to strive for enhanced environmentalperformance was a combination of ethical principles, economic efficiencies, passenger interest, bettercompany image, and liability concerns of banks and insurance companies, as well as the potential ofgaining a competitive edge. The airline had implemented a comprehensive environmental managementsystem and had introduced a number of tools and mechanisms to report environmental performance. Theseincluded:• Annual public and audited environmental reporting since 1995.• An environmental index that measured economic efficiencies derived from implementing environmental measures, e.g., eco-efficiencies.• Corporate environment policy obligating all managers to conduct an environmental assessment as part of their decision-making documentation. SAS also supported product stewardship programs and would only deal with suppliers who had environmental policies and management systems.• An online emissions calculator for passengers that provided a destination specific calculation of CO2 generated.6 Based on communications with well (former) head of sustainable business unit, British Airways, November 4, ·2002;environmental manager, Qantas, October 17, 2002; executive director, Air Transport Action Group, June 28, 2002; lATArepresentative, June 6, 2001.
  • Page 6 9B09M028A series of environmental goals, also established in 1995, had been revised over the years and expanded toinclude an "ceo-political vision" (SASs message to environmental policymakers), policy, overall andcommunication goals and strategy. Largely these environmental goals and policies involved:• Achieving profitability while minimizing environmental impact;• Being a forerunner in the development of internal environmental standards;• Desiring various forms of transport to be equally governed by the "polluter pays principle";• Harmonizing production, financial and "qualitative" goals;• Communicating SASs environmental performance and promoting stakeholder discussion;• Increasing environmental awareness throughout the organization by conducting environmental activities at all levels and in all decisions; and• Utilizing the methods that resulted in the lowest possible impact.The leadership role that the CEO, Jan Stenberg, took in making the environment a strategic priority hadhad strong impacts on how SAS managed environmental issues, described the vice-president ofprocurement at SAS: I believe SASs environmental agenda was driven, or at least heavily supported by our previous CEO Mr. Stenberg ... because he was aware of the importance of this. He did very much and he implemented quality measures and criteria for that. I would say he was the driving force behind that.Every manager with decision-making authority and budget responsibility was required to include anenvironmental impact assessment in the decision-making data, as stated in SASs environmental strategy.The airline had an integrated environmental management system in the total operations and management ofthe airline (TQM - Total Quality Management). See Exhibit 3 for an overview of SASs environmentalpolicy. Each year SAS measured both the overall and environmental image of the airline (see Exhibit 4). This measurement was based on a Customer Satisfaction Index. When the environment moved up to a strategic level in 1995, the environmental image was not as strong as the overall image. But gradually over the years, SASs environmental image had helped boost the overall image of the airline. There were several motivations embedded in this quest for a positive environmental image such as boosting the overall image of the company, improving the "brand" of SAS and living up to the spirit of the Scandinavian people."What is the value of a brand?" asked Niels Eirik Nertun, environmental director for SAS. "How do youquantify the increase in business because of a positive environmental image? If the overall image of SAS is improved because of our environmental image, then the cost of having an environmental department isjustified. "SAS management cited other reasons that it was important to maintain a positive image with respect toenvironmental commitment and performance such as:• Negative publicity as a result of a poor environmental report from human rights/environmental organizations could have dramatic and immediate effects on the companys bottom line - even if it was a result of a supplier and not the company itself;• A growing need for environment, ethical and social accountability through transparency and reporting;• As a tool for negotiation with government and NGOs;• Establishing a leadership role in dialogues about the regulatory environment; and
  • Page 7 9B09M028• Reacting to increasing pressure from corporate clients who were seeking ISO 14000 certification and who, as a result, were demanding environmentally responsible suppliers.The reasons why image and being a good corporate citizen were important to SAS may be associated witha deeper set of values and beliefs embedded in Scandinavian culture about the importance of caring for theenvironment. This was an important, yet indirect, influence on SASs pursuit of environmentalcommitment. "As a Scandinavian company," described a former chief operating officer for SAS, "wereflect the Scandinavian outlook on life. An outlook thats always been strongly connected with theenvironment. Thats why its rather natural for SAS to focus on the environment." Another seniormanager strongly expressed the importance of culture as a driver of environmental stewardship: I think that the society of the Scandinavians are simple, honest people. And from time to time we could be perceived as being a little bit naive in the international interaction. But the upside of it is that we do things like that because we like to be that way, and I think thats a driving force thats definitely being stimulated by corporate policies. The Scandinavian culture, the spirit if you like, appreciate having a company doing that. I think we would be hated by Scandinavian people, they wouldnt fancy having a company like SAS behaving badly, not in the environmental sector, not in other sectors. And the airline is always a very public type of business, everybody has a view on it and everybody has tried it and everybody is a customer as well. So it is probably from that perspective, even more important compared to other types of business. But that is on the rational side of it. Regardless of that, it is a matter of doing what you believe is good for society.The environmental director of the Swedish CAA remarked that a few years ago Boeing said that, on a scaleof one to ten, Scandinavian countries were a "twelve" with respect to environmental commitment. Theexecutive director of the Air Transport Action Group believed that it was not just about realities, it wasabout perception. SAS would be a big promoter of the environment because of Scandinavian culture.Culture played a strong role in shaping SASs reaction to the environmental challenges that it faced withinthe airline industry.THE DAC ENGINE DECISIONThe decision to purchase the 55 new aircraft was a long time in the making. Negotiations with variousaircraft and engine manufacturers spanned over almost five years.Sweden was considering tightening charges on airport emissions. The choice of aircraft was thereforecritical to meet anticipated future regulatory requirements. The decision to fit these aircraft with "greenengines," however, was not an easy one.Background of the DecisionIn the early 1990s, as SAS was establishing itself as a leader in the airline industry in terms ofenvironmental commitment, the airline developed an environmental policy stating that the company wascommitted to using the best available environmental technology. With regards to aircrafts, best availabletechnology referred mainly to selecting the best combined noise and emissions reduction technology.Updating the fleet provided the first major test of this commitment. While honoring the commitment wouldcause increased expenditure, not complying with this policy could cost the airline its reputation as an
  • Page 8 9B09M028industry leader in environmental management. SAS had worked hard to build its green reputation - animage that was also important to the Scandinavian people.Furthermore, the government-imposed emissions cap at the Stockholm airport had to be considered. Up tothat point, SAS had paid the tax related to CO2 emissions but the director of aircraft and engine analysis atSAS felt that the emissions cap could become a potential problem. If SAS, for example, had a fleet ofplanes that it could not fly into the airlines main hub because of poor aircraft environmental performance,then the financial implications of that decision could quickly become very serious.The next step was to evaluate potential aircraft with respect to noise and emissions and communicateSASs requirements for environmental performance to the manufacturing industry. The challenge was tocreate an optimal balance between the levels of noise, NOx and CO2• Nas encouraged the manufacturers tooffer an engine with superior environmental performance. Nas described how the process went: So we challenged the airline manufacturer - actually we strongly encouraged two manufacturers - to offer the two-stage combustors [as one option]. The combustors had been developed as a research effort back in the 1970s, so the manufacturers understood the technologies and techniques to reduce NOx even though it had not been commercialized.Since the B-737 had never been produced or sold with the dual combustor engine, technical hurdles had tobe overcome before the manufacturer could finally offer the product to SAS. Two manufacturers couldoffer the DAC technology for the engines to fit the B-73 7, but at significant additional cost for the engine.Nas also had to convince management to adopt a technology that had never been used with the B-737aircraft, knowing that using new technology could have unanticipated complications and added costs.The DAC engines represented just one of the many options the company had for outfitting the new fleet ofaircraft. There were many other decisions that also needed to be made regarding the B-737s. "So you haveto decide," Bengt-Olov Nas explained, "do I want the forward air stairs so can passengers can walk ontothe plane from the ground? ThatS an option, but it has a price and it also adds weight to that plane. Soyou have to evaluate that. The list goes on and on.,,The opportunity cost of other options SAS would notbe able to have on the new aircraft fleet because of the substantial extra cost of the engines also had to beconsidered. To push the DAC engines to the top of the "must have" list required additional drivers.Nas knew that a strong case had to be made for the engines. Talking to the management team was going tobe tough - while the chief executive officer thought that the environment had moved up to a strategiclevel for the airline, some of his colleagues were not convinced, particularly the chief fmancial officer anddeputy CEO. Nas knew he only had one chance to convince the management team to purchase the greenDAC engines for the new fleet.7 The other engine powered another aircraft that competed with the B-737.
  • Page 9 ,9B09M028 Elthibit 1 SUMMARY OF ENVIRONMENTAL IMPACTS GENERATED BY AIRLINES Environmental Issue Summary of Impact Factors Affecting Management Air Emissions • Carbon dioxide CO2 • Airlines choice of aircraft Air transport accounts for • Carbon monoxide • International standards developed by the International Civil Aviation 3% of global CO2 • Hydrocarbons (HC) Organization (ICAO) emissions and 12% of transportation CO2 • Oxides of nitrogen • Individual countries can impose (NOx) emissions emissions-related charges and taxes • Oxides of sulphur (SOx) • Emissions of international flights do • Condensation trails not fall under the present Kyoto (contrails) Protocol Noise Emissions • Most prominent during • Airlines choice of aircraft landing/take off cycle Exacerbated by (LTO) • Standards developed by ICAO (starting in the 1960s) increasing residential development near • Affects local residents • Landing charges for noise emissions and wildlife airports and under flight at some airports paths Congestion • Increased fuel use (and • Regional/national governments and thus emissions) caused their NGOs develop more effective air Up to 10% of aircraft fuel by circling busy airports traffic management systems use could be reduced and longer taxiing on through more efficient air the ground • Partly caused by national air space rules that sometimes prevent aircraft traffic management from flying the most direct route Waste • Solid waste from inflight • Local rules developed by each service and aircraft municipality or airport authority for Solid and hazardous grooming waste disposal/treatment of tarmac wastes run-off • Waste generated from airline administration offices • Hazardous waste from aircraft maintenance (e.g. petroleum products) and de-icing of aircraft (glycol)
  • Page 10 9B09M028 Exhibit 2TIMELINE OF IMPORTANT EVENTS, ACHIEVEMENTS AND LEADERSHIP IN RELATION TO CORPORATE GREENING AT SAS, 1994-2004 Awarded best Mercury Award First year Awarded best Best performance ~nvrf9r1"~~~··::,;, SASsfirst environmental environmental for best overall environmental thus far in SASs ·:~~~~:v~~~:!r;·~·· environmental report (1995) report in Norway and Sweden report externally audited (1997) service - cabin operations report in Europe (2000) environmental index (2002) (1996) (1999) . " .,~ Signing of Star Creation of joint Expansion of Creation of .E~~~~;i . -:-::," Appointment of environmental director (1995) Star Alliance environmental Alliance joint environmental commitment environmental department to 4 passenger emissions forum (1996) personnel (2001) calculator (2002) (1999) ·t).:~~ .: Forcetrreduction First discussion of Environment Unanimous support of developing an moves upto from board to adopt environmental ;M~~~~~;f environmental a strategic environmental department due .~:. policy (1994) level (1995) strategy at SAS(1996) to cutbacks (20021 I····; . .: ,- . Ye~r :..-<I " ," . -:, 1995 1997 ~ 2001 1994 1996 1998 ~ ~
  • Page 11 9B09M028 Exhibit 3 SASS ENVIRONMENTAL POLICY AS OF 1995 • Within the framework of SASs financial and qualitative goals, all operations shall be conducted so as to have the least possible environmental impact. • Through a long-term program, SAS shall become one of the airline industrys leading companies in the environmental sector. • Environmental work shall be conducted at all levels and within all units of SAS, thus creating increased environmental awareness throughout the organisation. • Environmental aspects shall be included in all material on which decisions are based. • SAS shall utilize or introduce methods which enable production with minimum environmental impact, characterised by low energy consumption, recycling potential, and minimal emissions. • SAS shall account for its environmental work in a separate annual report. • SAS shall encourage external parties to understand the role and environmental impact of air. Exhibit 4 SASS ENVIRONMENTAL AND IMAGE INDEX 1996-2006 [Index] [%] -----------------, ~::11 + 116 111 L111 106 t 106 ~ 101 101 j- 96 - I 96 1996 1998 2000 2002 2004 2006 _ Overall Image Index c=:lEnvironmentallmage Index ---Environmentallndex / Image Index
  • HARVARD BUSINESS SCHOOL 9-410-013 REV: SEPTEMBER 11, 20119JULIE BATTILANATHOMAS DELONGJAMES WEBEREchoing Green In early 2009, both Cheryl Dorsey and the organization she headed, Echoing Green, were at acrossroads. Echoing Green was a fellowship program that sought to improve society by identifyingand supporting social entrepreneurs who launched organizations to attack some of the worlds mostdifficult problems. In 2001, Dorsey had been named president of Echoing Green when theorganization was struggling to survive. It had almost no staff and was about to lose one of its twobenefactors. In the years since, Dorsey had turned Echoing Green around, re-built an organizationalmost from scratch, and had developed a broad base of donors to support its cause. Dorsey felt that Echoing Green was at a crossroads because it was facing much more competition.Where once Echoing Green had been a nearly lone pioneer, it was now at risk of losing its leadershipposition as numerous organizations with similar missions, some with significantly more resources,entered the field. Although Dorsey was confident that Echoing Green could have a greater impact onthe worlds problems! she believed that its current strategy that focused almost exclusively onselecting and supporting fellows was not sustainable in the long run.· Personally, Dorsey wondered whether she was the right person to continue to lead theorganization. She had been in her position eight years. Dorsey and her staff had made occasionalefforts to think about strategy over the years, but had not made any significant decisions. The staff,she knew, felt frustration over the resulting lack of strategic clarity for the future; particularly when.they were working so hard to help Echoing Green succeed. Dorsey asked herself whether she had theclout and reputation in her field to successfully take the organization in a new direction. Perhaps itwas time for someone with more gravitas to take over and succeed where she could not. If she wereto move on, she did not lack other opportunities she could pursue. She was serving part-time on thetransition team for the newly elected President Barack Obama. Dorsey was excited by Obamas socialinnovation agenda and believed this was a particular moment for social entrepreneurs and thosecommitted to addressing social challenges on a bigger stage. Adding to Dorseys challenges, in late 2008 the economy was in crisis and many Echoing Greensupporters were reducing or delaying their donations. This might force Echoing Green to cut back onsome of its existing activities and push back thoughts of new initiatives. As these issues weighed onher mind, Dorsey gathered her thoughts and prepared to meet with a consultant who was about toProfessors Julie Battilana and Thomas DeLong, and James Weber, Senior Researcher, Global Research Group, prepared this case. HBS cases aredeveloped solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations ofeffective or ineffective management. .Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163,or go to www.hbsp.harvard.edu/educators.This publication may not be digitized,photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
  • 410-013 Echoing Greenwalk through her door. She had brought in this consultant to help her think through Echoing Greensoptions.Echoing Green To drive transformatioe social change, Echoing Green identifies and funds some of the worlds bestemerging social entrepreneurs launching new high-impact organizations. Through our fellowship program, wesupport this community of visionaries as they develop new solutions to societys toughest problems. -Echaing Greens Mission Statement Echoing Green was a non-profit public charity. Its primary activities involved selecting EchoingGreen Fellows and providing those Fellows with seed funding and non-financial support. EchoingGreen had been a pioneer in the field of social entrepreneurship, providing maney to those startingan organization aimed at salving a social problem. Social entrepreneurs referred to individuals whofounded and developed such organizations. Echoing Green Fellows were social entrepreneurs whowere implementing a new idea to address a social, environmental, economic, .or political inequityproblem. (See Exhibit 1 far a list of several Fellows and a description of their organizations.) Fundingconsisted of a two-year stipend-ranging from $30,000ta $45,000per year in 20081-ta pay far livingor operating expenses of the Fellow while he or she launched an organization. Non-financial supportconsisted of leadership development, training, conferences, and networking opportunities aimed athelping Fellows succeed with their ventures. The selected Fellows tended to be yaung, recent college or graduate school graduates, with onlylimited experience -.Echoing Green looked far diversity in the organizations it selected in terms of thetype of problem addressed and the constituency who would benefit from the proposed organization. In fiscal year 2008, Echoing Green raised $3.7 million through its development efforts andprovided grants of approximately $1.6 million (See Exhibit 2 far the breakdown of expenses in 2008).Since its founding in 1987, the organization had provided funding and support ta aver 450 Fellowsworking in 40 countries. (See Exhibit 3 far historical financial data and Exhibit 4 far the number ofFellows selected each year.) Among the social enterprise organizations that Echoing Green fundedwere organizations such as City Year and Teach Far America in the United States, AppropriateInfrastructure Development Group (AIDG) in South America, African Leadership Academy inAfrica, Unis-Cite in Europe, and SKSMicrofinance in Asia. On average, by year two, the fund raisingefforts of the Fellows themselves raised three times the amount provided by their initial EchoingGreen grants. A high portion of the organizations launched by Echoing Green Fellows continued tooperate after the conclusion of the fellowship and 75% of the organizations where the foundingFellow departed continued under new leadership.Early History Echoing Green could trace its roots to the philanthropic activities of Charles Feeney. In 1960,Feeney co-founded Duty Free Shoppers Group (DFS) which said duty-free goods to travelers. Overseveral decades he grew the highly-profitable business and ather investments and became wealthy.1 Echoing Green gives $30,000 per year to individuals starting organizations and $45,000 per year to partners (i.e., twoindividuals) who are launching an organization together.2
  • Echoing Green 410-013Feeney, however, lived modestly and enjoyed giving money away more than spending it on himself.2Between 1982 and the end of 2007, Feeneys foundation, Atlantic Philanthropies, gave away $4.4billion in grants and had remaining assets of $4.3 billion. In 1980, Feeney had formed General Atlantic as a private investment fi.rm to manage the assets ofAtlantic Philanthropies and to generate cash for philanthropic purposes. He hired Ed Cohen tomanage the firm. In 1987, General Atlantic helped launch Echoing Green to identify entrepreneurslooking to start organizations to benefit society and then provide seed capital to help get themstarted. Cohen and General Atlantic professionals found candidates and evaluated them as if theywere evaluating a potential General Atlantic investment. Donations from both AtlanticPhilanthropies and General Atlantic were the two funding sources of Echoing Green. Cohen served as Echoing Greens chairman and was the organizations driving force. For much ofhis tenure at Echoing Green, he was acting essentially as its day-to-day president. Dorsey recalledthat while there were other people involved, Echoing Green was largely identified with Cohen andshe called him the "early guiding force" of the organization. When Cohen retired in 1995, the numberof Fellows selected each year began to fall. By 2001 only five Fellows were selected. Around the sametime, Atlantic Philanthropies notified Echoing Green that it was refocusing its giving and would notcontinue to support the organization; but it indicated it would continue to fund Echoing Green for afew more years to give Echoing Green time to make alternate plans. On the leadership front, Echoing Green hired first one president and then another. Neither wasquite right for the job. In 2001, it turned to Dorsey to become the new president of Echoing Green.Cheryl Dorsey Dorsey was born in Baltimore, Maryland, the only child of two public school teachers. Dorseyrecalled: My parents were among the first in their families to go to college. They were very devoted to me and instilled in me the belief that education is the road to self improvement. I grew up in an integrated suburb in the midst of the civil rights era. I went to public schools. Most of those who went to college stayed local, but I had the great fortune of going to an Ivy League school. Growing up, I felt I could see into two worlds: those who had access and opportunity and those who did not. Dorsey had always wanted to be a veterinarian, but in college she studied pre-med. She lovedcollege. She recalled, "I had a much broader undergraduate experience than the typical pre-medstudent." Dorsey had a particular interest in history and science and thought about getting a Ph.D.However, where she came from success meant being a doctor or a lawyer. Dorsey was accepted into Harvard Medical School, but deferred for two years to think about hercareer. As she progressed, she recalled, "1 just could not see myself as a practicing physician oropening a medical office." After a few years of medical school, she left to spend a year at HarvardsKennedy School of Government to start a Masters in Public Policy degree program. (Ultimately, shereceived both her M.D. and M.P.P degrees.) When she returned to medical school, she wrote anarticle for the medical school alumni bulletin about her program at the Kennedy School. The article2 Feeney story from Conor OClery, The Billionaire Who Wasnt: How Chuck Feeney Secretly Made and Gave Away a Fortune (NewYork, NY: PublicAffairs, 2007).3 Atlantic Philanthropies financial data from organizations Web site, http://atlanticphilanthropies.org, accessed AprilS, 2009. 3
  • 410-013 Echoing Greencaught the attention of Dr..Nancy Oriol, an obstetric anesthesiologist and Harvard Medical SchoolAdministrator. Oriol contacted Dorsey because she was interested in starting a community-basedprogram to address the high infant mortality rates among African American babies in inner-cityBoston. Their work led Dorsey and Oriol to co-found the Family Van, which consisted of a medicalvan that drove to inner-city neighborhoods to provide health care services to residents who haddifficulty accessing traditional sources of primary care due to financial or other barriers. Dorseylearned of Echoing Green when searching for funding for the Family Van. She applied and wasselected as an Echoing Green Fellow in 1992.Dorsey spent several years running the Family Van andthe organization itself continued to exist in 2009. Dorsey recalled that when she was selected as a Fellow, Echoing Green was more focused on thecharacteristics of the applicant than the specifics of their ideas. When I was selected as a Fellow, it was very much about the human capital component. I had passion for what I wanted to do. Echoing Green and General Atlantic had a strong commitment to back young people like me, giving us a chance to live out our dreams. Dorsey also found herself attracted to the people she met through Echoing Green: No one called us social entrepreneurs then. We were doing public service, community service, but it was a bunch of people like me doing work in a variety of areas. It was Wendy Kopp, the founder of Teach For America, it was Vanessa Kirsch, the founder of Public Allies, it was Alan Khazei and Michael Brown, the founders of City Year, it was David Carmeland Aaron Lieberman, the founders of Jumpstart, and others. It was a community of like-minded people-extraordinary young people out to change the world-and I had never met a community like that and I was just blown away by them. Later in the 1990s, Dorsey served as a White House Fellow, as Special Assistant to the US,Secretary of Labor advising the Clinton Administration on health care quality issues, and as SpecialAssistant to the Director of the Womens Bureau of the U.S. Labor Department, where she helpeddevelop family-friendly workplace policies and spearheaded the labor secretarys pay equityinitiative. Dorseys work earned her numerous awards and honors including the Pfizer RoerigHistory of Medicine Award, the Robert Kennedy Distinguished Public Service Award, and theManuel C. Carballo Memorial Prize. She wrote and spoke widely on minority affairs, social justice,social entrepreneurship, and maternal and child health issues. Dorsey also retained her connections to Echoing Green. In 1998 she joined its board of directorsand in August 2001, she left the board to take over as interim president. General Atlantic managingdirector and Echoing Greens founding board member and current board chair, David Hodgsonrecalled: We knew we were losing our main funder and the board felt that our then president was not the right person to help us transition to being a self supporting organization so we let him go. We found ourselves in a crisis without a president so we prevailed upon Cheryl to step in on an interim basis. The board would have liked to offer her the job on a permanent basis, but Cheryl indicated that she was not available.The First Year Dorsey recalled that Echoing Green was an organization in trouble when she took over:4
  • Echoing Green 410-013 It was a phenomenal organization, with a phenomenal vision and mission, but it was struggling through a variety of hardships, lack of stable leadership, lack of processes and organizational architecture to bolster that vision, and uncertain funding since Atlantic Philanthropies had notified Echoing Green that it would not continue to support the organization. Also, many staff members had left and had not been replaced. Echoing Green also suffered from the charismatic founder syndrome. It was so closely identified with Ed Cohen that when he left, the organization had trouble living and breathing without him. When I stepped in, there was almost nothing, no organization to carry forth his vision-just a track record of selecting terrific social entrepreneurs. In mid-200l, Echoing Green had just two full-time employees; a vice-president and an officemanager (down from 15 employees a few years earlier). The lack of organization became apparent toDorsey when she found that Echoing Greens records were in boxes stored in someones apartment.There was enough uncertainty around the future of the organization that she did not try to hire astaff. Dorsey, who lived in Washington, DC, was commuting up to New York. To save money, shestarted sleeping on a couch in the office until she found out that it was illegal to live in commercialreal estate. She quickly found herself willing to do whatever it took to keep Echoing Green going. "1am not an athlete," she explained, "but I know what they mean when they say they are in the zone. Iwasnt thinking about all the work or about how hard it would be." Dorsey believed that the only way Echoing Green would survive the next few years was ifGeneral Atlantic continued to support it. She explained: It became my priority to figure out how to get them to stay with us and to engage in a new way and really own it. I needed to convince them that this was their legacy. I made sure I was over at their offices frequently, reminding them, telling them "Look what you have done, from Teach For America, to Public Allies, to SKS Microfinance, to Working Today, to MacArthur Genius Award winners, and many others. I hope you understand the legacy you have created in the social sector." Applications for the 2002 class of Fellows arrived in the fall of 2001. There were piles coming inevery day as the deadline approached. Dorsey sat in a room and along with some volunteer readersreviewed over 1,000applications from all over the world. She had planned to select about a dozenFellows, but, as she recalled, flitwas the most amazing group of people. I told David [Hodgson] that Ididnt know how were going to pay for it, but weve got to select more than we planned. He said OKand that spring we tookJ9." In May 2002, Dorsey became available to work full time for EchoingGreen and the board named her president on a permanent basis.Building a Team and an Organization Over the next six years. Dorsey used that time to build a more self-supporting organization. Bylate 2008, she had three main functional areas reporting to her. Heather McGrew joined EchoingGreen in 2002 and eventually became the vice president of fellow and alumni programs. She wasresponsible for all the activities relating to selecting and supporting Fellows and running conferences.She also served as Echoing Greens finance director as no one had been hired to fill this position. LaraGalinsky was hired in 2003 and served as the vice president of strategy and communications. Shehelped create the new Echoing Green brand and co-authored with Dorsey Echoing Greens book, BeBold, which told the stories of 12 Echoing Green Fellows and was written to inspire young people asthey thought about their careers and social change. The book was Galinskys idea and was the 5
  • 410-013 Echoing Greenbeginning of the "Be Bold" initiative which included a "Be Bold" web site and plans for a secondbook. Carolyn Bess, also an Echoing Green Fellow alumna, joined in 2006 and became the vicepresident of development. Bess was responsible for all aspects of fundraising and in doing so workedclosely with Dorsey who also spent significant time on fundraising activities. In all, Echoing Greenhad 16 employees. (See Exhibit 5 for an organization chart.) All of the senior team first carne to Echoing Green as volunteers or consultants. DescribingDorseysapproach to recruiting her staff, McGrew explained: I carne from the private sector and have an MBA.Cheryl did not say, "I need someone from the private sector with an MBA and marketing and operations experience who can do all these things." Cheryl is someone who sees someone with talent that she likes and thinks "I dont know what Im going to do with you but Ill find something. She did that with just about everyone she hired. Dorsey gave a lot of autonomy to her senior management team. She was very busy being theexternal face of the organization. She traveled and she spoke frequently with a variety of audiences,such as potential donors and Fellows, to promote the work of Echoing Green. That kept her awayfrom the office on many days. McGrew, Galinsky, and Bess agreed that Dorsey was a strong, externallooking, big picture visionary, and a highly inspirational leader. One stated, "Cheryl is a visionary.She has a lot of big ideas and has the ability to make you dream her dream." Another added, "Cherylis an incredibly inspirational leader. She is very charismatic and incredibly articulate." Dorsey also spent time building a board of directors. When she stepped off the board in 2001, theboard had only four members, one of whom was Oriol. By 2008,the Echoing Green board consistedof 14 individuals and included a good mix of people with business and social sector experience.The Echoing Green Business Model Echoing Greens business model was simple and straight forward: select Fellows with greatpotential to improve the world, support those Fellows to improve their odds of success, and use theirstories to attract donors so it could find and support still more Fellows: Selecting Fellows, supportingthem, and raising money were Echoing Greens primary activities.Selecting Fellows In the fall of each year, applicants completed an online application, wrote a short essay describingtheir organization, and provided a personal resume. Echoing Green received between 800 and 1,400applications in a typical year. Each application was reviewed. by at least two Echoing Green staffmembers and also by four to five volunteer evaluators who were experts in the proposed area of theapplicants field. Echoing Green selected between 150 and 300 of these applicants to move into asecond phase. Here, applicants provided longer, more detailed essays, an estimated budget for theirorganization, a sector analysis of their proposed area, and personal references. Dorsey, Galinsky, McGrew and a couple others from McGrews team sat together in a room for aweek and painstakingly went through the top 100 applicants to decide which roughly 30 applicantsto advance to the final round, referred to as the selection weekend. For selection weekend, often heldin May, Echoing Green invited the finalist to come to New York to present their "bold idea for socialchange" and have several in-person interviews. Echoing Green paid for the applicants travelexpenses for this trip. The weekend included each applicant making a 90-second idea pitchpresentation to an audience made up of the other finalists and a judging panel made up of previous6
  • Echoing Green 410-013Fellows or other individuals from non-profits, for-profits, universities and other foundations whosupported Echoing Greens mission. After the review process, the judges, plus Dorsey and her team,each cast a vote as to which applicants they thought should receive a fellowship. Dorsey describedhow the process worked: While we have a scoring system, in the end it is an art and not a science. There are many applicants we can easily eliminate and a few we can easily accept, and then there are the tough choices. Its the same tension every year. People say, "I dont understand why you selected this person. Why is their idea or program better than this other persons?"Supporting Fellows McGrew, who headed this area, explained that despite their great ideas, Fellows tended to beinexperienced entrepreneurs who needed help to succeed: Our Fellows corne in with an abundance of energy, inspiration, and ideas. What many need help with are basic issues such as financial management, dealing with a board, or managing volunteers. If our Fellows cant run their organizations, it doesnt matter how great their ideas are. One Fellow spoke highly of the support she received from Echoing Green, but wished there couldbe even more: "Their support network is excellent. They attract people that dont just have a fleeting interest in social entrepreneurship but have a long-term passion for it and actually step up and follow through with help. . Theyre less good at telling you what to do and sometimes you want that. Every Fellow struggles with the same startup issues. Echoing Green could say, "These are the five best practices for this, the best practices for that. And they dont do that. Thats what I mean by they dont tell us what to do."Fundraising Carolyn Bess described Echoing Green as a 22 year-old organization with only six years ofexperience in fundraising. She explained: When I started there was still a lot of low hanging fruit in terms of who we could ask for money and the economy was good. I could tap some of our board members for referrals, meet someone for breakfast for the first time, and walk out with a $5,000check. Now the economy is tougher and things have slowed down. Bess explained that Dorsey played a very special role in fund raising because of her background and her charisma, and because of what Echoing Green was trying to do. Bess stated, "Because we invest at such an early stage, it is hard, for us to detail the impact we have in a way that many donors are looking for. But we are very story driven, anecdote driven, and Cheryl delivers that for us in a very inspirational way."Strategic Options As Echoing Greens fundraising ability developed thanks to the work of Dorsey and Bess,questions arose re9arding how to allocate its revenues. In late 2006, the Boston Consulting Group 7
  • 410-013 Echoing Green(BCG) produced a strategic review for Echoing Green on a pro bono basis that outlined severaloptions: • Stay the course-do not make any significant changes. • Grow the existing program-more Fellows, potentially larger or longer funding for Fellows, more coaching and support of Fellows. • Develop new programs. Echoing Green had several possible new programs it could introduce. One possibility was toexpand its youth focus. Fellows tended to be young, college-age or a bit older. There were millions ofpeople in this category, yet Echoing Green could only select a few as Fellows, Echoing Green mightsupport, encourage, or be a resource for many more young people interested in socialentrepreneurship in ways other than its Fellows program such as the "Be Bold" initiative that hadbeen launched in late 2006 with the objective to inspire, more young people to develop meaningfulcareers in the social sector. Echoing Green might also offer a number of Echoing Green Awards orsocial idea competitions. Another possibility was to develop a "thought leadership" component.Echoing Green had over 20 years of experience in social entrepreneurship and had learned a lot. Itmight be possible to unlock that accumulated knowledge, conduct additional research, and make itavailable to other organizations. Finally, Echoing Green could provide some level of funding orsupport to its Fellows throughout their social entrepreneurial careers. Many early Echoing GreenFellows were reaching points in their careers where they had achieved high levels of influence intheir fields. Echoing Green might support them in a way to leverage even greater levels of socialchange. At the time of the BCG report, some board members expressed concern that the existing programof Echoing Green looked too expensive to be only funding a dozen or so Fellows per year. The boardwanted Echoing Green to increase the number of Fellows to at least 20 before thinking aboutdeveloping new programs. The next selection year, in 2007, Echoing Green welcomed a class oftwenty fellowship organizations and twenty-five fellows.Personal Reflection and Development Over the next 15 months, Dorsey faced a period of personal crisis. Both her parents, with whomshe was very close, died within several months of each other. Two aunts also passed away as did agodfather. She felt that she had lost most of her family in a short span of time. In the midst of her personal crisis, Dorsey received a $60,000"Prime Mover Fellowship" awardedby the Hunt Alternatives Fund. To receive such a fellowship, an individual must be nominated by anindependent panel for his or her work as a social movement leader. Award winners must use thegrant over two years for personal professional development activities to enhance their ability to be aneffective leader for their movement. Dorsey felt honored to win the award, but initially wanted toeither turn it down or defer acceptance to a later date to allow herself time to get through her familyissues. In the end, however, she accepted the award after the fellowship director advised her thatnow was the perfect time for self reflection. Dorsey used part of the award to hire a strategy consultant to help her think through issuesrelating to Echoing Green and her professional development in new ways. She also attended severaldevelopmental retreats to have time for reflection.8
  • Echoing Green 410-013 In 2007 and into 2008, the social sector got hot. There was a push in the social entrepreneurshipcommunity to get the issues facing it injected into the U.S. presidential race. Representatives from thecommunity spoke with all presidential candidates and tried to convince them to make social issues apart of their campaigns. Dorsey involved herself in this process, but felt that she was not as preparedto participate as she would have liked. She then used part of her Prime Mover grant to hire a policycoach who could deepen her understanding of policy issues. Dorsey came to believe that she had theskills to be an effective thought leader for Echoing Greens brand of social entrepreneurship. WhenBarack Obama was elected in November 2008, Dorsey joined his transition team in Washington on apart-time basis while continuing to run Echoing Green. Looking back in late 2008 on this period of reflection and development Dorsey found she hadlearned a few things about herself and the work of Echoing Green: There was a capacity issue at Echoing Green where we were so understaffed, under resourced, and overworked that there had been little time to step back and look at the bigger picture. During this time of reflection, I developed a much stronger sense of confidence in myself as a leader in this field and as a content expert. I had had a tendency to second guess myself. I became clear that I did know what I was talking about, that I really did understand the issues.Echoing Green in 2008 Despite the economic downturn by 2008, Echoing Green had a lot it could be proud of: it wasraising more money, selecting more Fellows, providing more services for Fellows, and developing anew initiative from the strategy team, the "Be Bold" program. Dorsey focused her attention on being the external face of the organization. She continued tospeak with a variety of audiences to promote the work of Echoing Green. This included significanttime spent with potential donors to raise both money and awareness, time with audiences of youngpeople who were potential Echoing Green Fellows or future social sector leaders. Hodgson furtherdescribed Dorsey: People associate the organization with Cheryl. She is incredibly bright, passionate about what she does, and very committed to the organization. It is about energizing people and a lot of personal charisma is critical when you have a small staff and depend on outside donors. Cheryl is an important asset and the organization has been dependent on her, and a very few others to drive the organization through personal leadership capability. Dorseys working style, however, impacted the office and led to some frustration among her staff.Her frequent travel continued to keep her away from the office.Additionally, the nature of the workand the quality of her people were such that each of Dorseys key reports could work independentlywithin their own teams. This led to an atmosphere where there was little internal collaboration. Someon her staff felt that there had not been a great need for collaboration. One top manager reported thatshe could go weeks without meeting with Dorsey. She enjoyed the autonomy that gave her and thetrust that Dorsey showed in her to do her work. Another, however, commented that sometimes thestaff needed to hear from the top person herself. McGrew, Galinsky, and Bess.who were all key figures at Echoing Green, generally shared similarviews of Dorseys internal leadership and on the working environment at Echoing Green. One stated,"Cheryl is incredibly smart, but is not very pragmatic or process-oriented-shell tell you her idea,then leave the room and its just supposed to happen." Another added that "internal issues can reach 9
  • 410-013 Echoing Greena boiling point before she gets involved." Another explained that while Cheryl has had an impressivecareer before coming to Echoing Green, "she has never really been an employee anywhere so some ofwhat we have to deal with here does not fit into her consciousness." Finally, one added, "Cheryl isreally not a manager. It is just not in her DNA." Because Dorsey spent little time focused on management, Bess, Galinsky, and McGrew filled in.This happened without any formal decisions or assignment of tasks. It was common, for example, forGalinsky to run a staff meeting when Dorsey was unavailable. At times, Galinskys taking on this rolecreated some awkwardness because she was the youngest member of the senior team. Galinskydescribed some of the challenges that the situation caused: There are four very sharp individuals who have distinct personalities who are on top here and who feel lots of emotional attachment to what we are doing. And when we work so hard and we make so many personal sacrifices for this organization, it can get messy. Each department was its own fiefdom and we each held on tight to our part because we had ownership of it. There would be weeks without us needing to talk and then when there were issues, wed bump heads. Were all reasonable people so wed solve it, but it caused tensions and a lack of alignment. The staff was also frustrated with a lack of clarity around the strategic direction. Since the BCGstrategic review in 2006, Dorsey had brought in another strategy consultant using part of her PrimeMover grant to help her think through Echoing Greens strategic position and options. At times, theseefforts involved staff interviews and meetings. One junior-level staff member stated: We have gone through at least two sets of consultants. I think everyone is well-intentioned and we are seeing some progress, but I am not sure that everyone trusts the process. They [upper management] would tell us we are going in one direction and then a few months later they tell us we are going in another direction. Sometimes they are telling us the plan, other times it is like they are sharing ideas and brainstorming with the staff. They have cried wolf a few times already. Dorsey herself was becoming increasingly concerned with their existing strategy that focusedexclusively on selecting and supporting Fellows. Echoing Green, once a pioneer in the field of socialentrepreneurship was by 2009 one of many players in the field, including Ashoka and the SkollFoundation. Social entrepreneurs occasionally received funding from several sources. Dorseyreflected: Echoing Green is a fellowship program that selects emerging social entrepreneurs: were angel investors-first funders. Thats been our bread and butter, but I just dont think that it is sustainable anymore. First, the field of social entrepreneurship has grown tremendously. We are now one of many players, and thus have to ensure our market position is still strong. Second, we can look at these amazing social entrepreneurs we have funded and ask; "To what end?" We have put islands of excellence out in the world, but have we ended poverty in inner city communities? Have educational inequities been eliminated? No. One of my board members, who noted that our Fellows are wildly successful, asked me whether we were really making our Fellows successful, or were we simply picking great Fellows who would be successful with or without us?10
  • Echoing Green 410-013The Mirror After the consultant Dorsey hired to help her on strategy issues had settled into her office thatday, he provided an unexpected challenge. He held up a mirror to Dorsey and asked her, "Where doyou want to take Echoing Green? What feels right to you?" 11
  • .110-013 Echoing GreenExhibit 1 Examples of Echoing Green Fellows and Organizations Katie Orenstein 2008Fellow. Founder of The Op-Ed Project. Over 80% of Op-Ed (opinion) pieces appearing in U.S. newspapers were written by men. Asignificant cause of this gender imbalance was that a large majority of Op-Ed pieces submitted toeditors for consideration to be published were submitted by men. Orenstein founded the Op-EdProject to diversify the public debate by identifying women experts and training them to write andsubmit Op-Ed pieces. Jane Chen and Rahul Panicker 2008Fellows. Founders of Embrace. Twenty million premature babies were born each year of which four million died and many moresuffered long-term health issues. Many deaths and health issues could be prevented through the useof incubators to regulate body temperature. In developing countries, incubators were expensive andtended to be available only in urban hospitals. Chen and Rahul were developing a $25 incubator thatwas portable, used no electricity, and had no moving parts so that it could be used in homes andother areas where traditional incubators were unavailable. Elizabeth Scharpf 2008Fellow. Founder of Sustainable Health Enterprises (SHE). A large portion of girls in developing countries missed school, and therefore opportunities foreconomic advancement, because they lacked access to affordable, high-quality sanitary pads formenstruation. Scharpf founded SHE, a non-profit, to develop affordable, quality pad materials andcreate women owned and led for-profit SHE franchises in developing countries to manufacture anddistribute pads and provide economic opportunities for women. Ben Smilowitz 2008Fellow. Founder of Disaster Accountability Project (DAP). Smilowitz worked as a Red Cross volunteer and saw firsthand the governments failed responseto Hurricane Katrina in 2005, and later how many recommendations to improve disaster response inthe U.S. were not implemented due to a lack of an effective oversight system. Smilowitz formed DAPto empower the public to provide oversight by creating a forum through which citizens could assessdisaster plans, ask questions, and hear from whistleblowers regarding the countrys abilities indisaster prevention, response, relief, and recovery systems. Michael Gainer 2007Fellow. Founder of Buffalo ReUse. Declining population since the 1950shas led to 23,000unwanted residential structures in Buffalo,NY. Gainer launched Buffalo ReUse to deconstruct structures in a way that allowed for the resale andreuse of building materials to improve existing homes, training and job opportunities for youngadults, and the creation of community gardens and parks. Clive Stafford Smith 2005 Fellow. Founder of Justice in Exile. The "War on Terror" led to an estimated 10,000"ghost detainees" from over 50 countries held.indetention centers such as Guantanamo Bay that were essentially "law free zones" (beyond the reachof the law). Justice in Exile sought to establish centers around the world that would provide legalrepresentation to individual prisoners, and, through legal and public relations strategies, bring therule of law to such detention centers.Source: Adapted from company documents.12
  • Echoing Green 410-013Exhibit 2 Breakdown of Expenses in FY 2008 ($)FELLOWSHIPS Fellowship Stipends $1,382,500 Fellow Conferences & Gatherings 133,510 Fellowship Support 107,275 Fellow Search & Selection 114,907 Alumni Proqrarns= 162,143STRATEGY & COMMUNICATIONS Marketing & Communications $ 82,403 Strategy Research 74,011 Be Bold Initiative 63,207 Social Investment Councilb 26,337 Thought Leadership 125,537DEVELOPMENT Fundraising Activities & Research $ 35,561OFFICE & INFRASTRUCTURE Staffing & Benefits $1,076,762 Accounting, Insurance & Legal Services 221,889 Office Lease & Related 172,574 Infrastructure Support 126,062TOTAL EXPENSES $3,904,678Source: Company documents.aA special donor initiative that provided restricted funding for third-yearfunding for some Echoing Green fellows exiting their fellowship.b-rhe social investment council is Echoing Greens "young professionalsboard" that fundraises for Echoing Green and provides strategic assistance toEchoing Green Fellows. 13
  • 410-013 -14-Exhibit 3 Summary Financial Data ($ thousands, except number of donors, fiscal year ends June 30 of the year indicated) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Total revenue" $3,093 $2,976 $2,992 $3,177 $2,725 $2,281 $2,205 $2,028 $2,046 $3,821 $ 2,372 $3,708Grants paid 1,935 1,492 1,259 1,397 1,241 711 1,221 721 1,330 873 1,392 1,558bOther expenses $ 865 $1,262 $1,348 $1,537 $1,963 $1,249 $1,027 $1,108 $1,234 1,490 $ 2,075 $2,347Talai expenses $2,800 $2,753 $2,607 $2,935 $3,204 $1,959 $2,248 $1,829 $2,564 2,364 $ 3,467 $3,905Excess revenues over expenses $ 293 $ 222 $ 386 $ 42 $ (479) $ 321 $ (43) $ 199 $ (518) $1,457 $(1,095) $ (197)Total assets (fair market value) $ 572 $ 794 $1,207 $1,469 $ 986 $1,317 $1,561 $1,532 $ 860 $ 994 $ 1,284 $2,284Donations from Atlantic Philanthropies? $2,980 $2,708 $2,720 $2,000 n/a $1,500 $1,300 $1,100 $ 0 $ 0 $ 0 $ 0Number of donors? 2 3 4 9 n/a 3 3 4 22 40 72 87Source: . Echoing Green Forms 990 1996-2007, accessed through GuideStar USA, http://guidestar.org, accessed April 2, 2009.aNearly all revenue came from donations raised through its development efforts.bThis is summation of the $1,382,500 Fellowship Stipend expense incurred in FY 2008, plus $80,541 reimbursed Health Insurance to the fellows (categorized under Fellowship Support in Exhibit 2), andplus $95,000 from the Accelerator Grants program (categorized under Alumni Programs in Exhibit 2)."CAtlantic Philanthropies donated anonymously prior to 2004. In 2004, it donated $1.1 million under its name and Echoing Green received no large anonymous donations that year as it had in earlier years.Casewriters believe that large anonymous donations from 1997 to 2003 came from Atlantic Philanthropies.dRepresents the number of donors who contributed $5,000 or more in that year.
  • Echoing Green 410-013Exhibit 4 Number of Fellows- Selected by Year 60 J .•... Q) 50 u Q) Q) V) 40 3 o 30 - Q) u, o - Q) 20 ..0 E :J 10 Z oSource: Adapted from company documents.a Because two Fellows could work on a single project, the number of projects was less than the number of Fellows. In 2008, 27 Fellows worked on 19 projects while in 200512 Fellows worked on 11 projects. 15
  • 410-013 -16-Exhibit 5 Organization Chart 2008 Cheryl Dorsey President Special Assistant to the president Heather McGrew Lara Galinsky Carolyn Bess Vice President Vice President Vice President Fellow & Alumni Strategy & Development Prozrarns Communications Senior Recruitment Bookkeeper Senior Program Assoc (Part Time) Associate Associate Associate Program Associate Associate Associate Part- time intern Associate D On Staff D Open Position filled in by Heather McGrew Office CoordinatorSource: Adapted from company documents.
  • HARVARD BUSINESS SCHOOL 9-409-113 MAY 28, 2009NITIN NOHRIAMARTHA LEE SPAULDINGWho is the Fairest of Them All? Choosing a Leaderat Deronde International Nothing could be more beautiful than a June morning in Paris, thought Alain Deronde as he descendedthe steps below Sacre Coeur, The streets of Montmartre were throbbing with life, as schoolchildren,young couples, tourists, and Parisians of every hue basked in the days warmth and their own highspirits, This neighborhood had been a favorite of his since his student days, and he came here often,particularly now that his daughter, Jasmine, lived nearby, They were to meet for lunch in just a fewminutes. . Surely Paris was the most cosmopolitan city in the world-arid yet it remained so immutablyFrench! Alains grandfather had been determined to capture the paradox when his companymarketed its signature perfume, Insouciance, back in 1923. The multifaceted crystal stoppersuggested the many faces of Paris, while the bottles upward flare symbolized the City of Light. Alain always smiled when he caught the scent of Insouciance in a crowd, but that happened rarelythese days. His grandfatherS perfume and beauty-products business had grown into DerondeInternational, with global sales of € 15 billion and dozens of fragrances in its portfolio. Alain was itsCEO. As a boy and as a young man he had thought the company was eternal and impregnable-likethe Louvre or Notre Dame. For decades Insouciance had outsold every other perfume in the world.Now it didnt even rank among the top. 10. He heard a small boy squeal in the crowd. The boy wastugging at his fathers sleeve and pointing. Alain turned to find a photo shoot setting up behind him.Alain recognized the exotic model from a competitors wildly successful ad campaign: She was oversix feet tall, her features a blend of African and Asian, her hair a red-gold nest of dreadlocks. A jadechoker encased her chocolaty neck. She was both stunning and fearsome. Hed seen her posed infront of the Hermitage, the Taj Mahal, and even the Great WalL Whatever happened to Catherine Deneuve? he thought, and walked on. A Succession Crisis In just the past few years Deronde International had begun to lose market share to its topcompetitors, particularly in China-where consumers found Western scents unpleasantly strong-Professor Nitin Nohria and independent researcher Martha Lee Spaulding prepared this case. The company mentioned in the case is fictional.HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, orillustrations of effective or ineffective management. The sequel to this case has been published by the Harvard Business Review (january 2009)http://blogs.harvardbusiness.org/ics/2008/12/whos-ready-for-the-executive-s.html.Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163,or go to www.hbsp.harvard.edu/educators.This publication may not be digitized,.photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
  • 409-113 Who is the Fairest of Them All? Choosing a Leader at Deronde Internationaland Brazil. Its performance had slipped so far, in fact, that a rival had offered to acquire the company.Alain had declined to even hear the details, but it had been a humiliating moment for him. Some ofOIs product lines were still flourishing, but they were all aimed at the European and NorthAmerican markets. Alain ruefully admitted to himself that hed been unprepared for the industrysmeteoric growth in emerging markets. He wouldnt go so far as to say that complacency had beenOIs undoing-though Jasmine might cheerfully use that word-but it now seemed that-some of thecompanys leaders had presumed its long experience and superior technology would magically partthe sea wherever it tried to enter a new market. In hindsight it was a glaring strategic error. Alain and his top team had scrambled to adjust,setting themselves some ambitious goals: A return to vigorous growth-at a rate of at least 12% forthe next five years-was paramount. For 30 years the company had sustained double-digit growth,but for the previous five the rate had been an anemic 5%.The looked-for growth spurt would dependon successful new-product development along with more-aggressive marketing of recent launches;products introduced in the past three years would have to start contributing more than 25% of totalrevenues (up from 10%) just to keep pace with the competition. The share of DIs revenues fromemerging markets would have to increase from 15%to a minimum of 25%. Finally, 25% of the futuregrowth would have to come from smart acquisitions, whether of brands or small companies; Alainand his team now conceded that they could not rely on organic growth alone. If these goals were to be realized, both product development and talent development would needfundamental revamping. The team was convinced that increasing diversity in both areas wasessential to their success. Products must be developed in more innovative ways; fresh talent mustbring a variety of creative new perspectives to all levels of the company. Deronde International mustbe seen-both internally and externally-as placing the utmost value on excellence, without regard forthe origin of the person or idea. Alain was proud of the progress theyd made in the past two years. Daniel Reynard, DJs SeniorVice President for Human Resources, had put together a state-of-the-art performance-managementand talent-development system, designed to increase the quality and diversity of both executives andemployees. Managers were now assessed every year on their leadership capabilities as well as theirbusiness results. Cross-company input had been distilled into a leadership competency modelconsisting of 19 characteristics that fell into four general categories (see exhibit 1). Assessments wereconducted using this tool and 360-degree feedback- from the managers boss, another superior, twoor three peers, and six to eight randomly chosen subordinates. Annual raises and bonuses were stilltied primarily to a managers performance on key business objectives, but the competency-modelratings had become fundamental to a yearly discussion of the talent pipeline, in which teamsreviewed the dossiers of all their direct reports and one level below. The process was designed to generate individual development plans and also succession plans forevery managerial position in the company. It would give special attention to women andinternational leaders, in an effort to increase the diversity of the leadership pool. There had been a lotof debate about whether the company should set diversity targets, as it had set other growth goals-perhaps 25% women and 25% international leaders. But Alain feared this might smack of quotas,leading people to resist rather than embrace diversity. The company had succeeded in hiring a new SVP for Global Product Development, a man namedRene Pelletier, away from its top competitor, in part because Pelletier had been at school withReynard. The new SVP, who reported directly to Alain, had taken nearly instant control of a groupseverely demoralized by his predecessors lack of leadership skills. Hed cut the divisions attrition2
  • Who is the Fairest of Them All? Choosing a Leader at Deronde International 409-113rate--dose to 28% the year he joined-to 15%. Hed steered 01 toward open-source innovation,forging partnerships with a network of boutique designers and small entrepreneurial companies,with the result that Deronde International had radically departed from a history of self-sufficiency tomake its first significant acquisitions. And hed expanded the group to 500 members while openingnew labs in Singapore and Sao Paulo. But Pelletiers bright promise was about to be extinguished; Alain had learned the week beforethat his friend and colleague had an advanced case of pancreatic cancer and would have to stepdown immediately. Thanks to Reynards system, four candidates for succession were at the ready.Alain urgently needed to choose Pelletiers successor before Global Product Development sank intofunctional as well as emotional disarray."Doesnt He Use Your Tailor?" Over lunch Alain told Jasmine about the crisis facing Deronde International. Since the death of hiswife, 15 years earlier, his daughter had been the only woman in Alains life. She often acted as hishostess and listened patiently whenever he wanted to talk about the business-just as her mother haddone before her. But the similarity seemed to end there. His wife had been quietly supportive andnurturing, always at his elbow or behind him, never squaring off confrontationally the way Jasminesometimes did. How had their daughter become so independent and outspoken? Was that why shewas still single? With every passing year his dream of a grandson felt more elusive. "Weve narrowed it down to four candidates," he told her. "One of them is your friend YvesSaurac." Hed made an unsuccessful attempt several years earlier to interest Jasmine in thispromising young man. "What do you think?" Jasmine smiled. "You know how I feel about Yves," she said. "Hes just too proper and traditionalfor me. Even so, 1 always had the feeling that he was a bit of a chameleon-as if he was trying outversions of a petit ami on me. But he would certainly fit right in." She arched an eyebrow. "Doesnt heuse your tailor?" His daughter was an ambitious young law associate who, in Alains opinion, had a bit of a chip onher shoulder. She took the fact that her firm had never had a woman senior partner as a personalchallenge, and she often joked about the monotonous composition of her fathers executivecommittee. Unfairly so, in his view: The committee included a Brazilian and-at least until recently-a woman ("Thats only 12%of your top team, Papa ... "), who two months before had made a clearlyanguished decision to accompany her husband when he relocated to Hong Kong. "Elise Bernier is a candidate, too," Alain said, feeling absurdly gratified that he could offer upanother woman. "Youve met her at dinner." Jasmine remembered Bernier as well-informed andadmirably cool. "Were also looking at Yang Jianguo, one of our most brilliant scientists, and atAntoine Lambert. Hes the one who created Coeur Tendre." Lamberts boutique line of high-end spaproducts, developed without animal testing, had been a hugely profitable acquisition forDl. "I know," Jasmine said, "and Im one of your most devoted customers." She pulled an atomizerfrom her bag to make the point. Animal rights was another of her hot buttons. "Lambert is a hero tothe movement. Hed send a strong message about the companys values." 3
  • 409-113 Who is the Fairest of Them All? Choosing a Leader at Deronde International "Im not sure how far it would travel," Alain said. "Does animal rights play in China? Anyway,Id love to have your reactions, in light of everything youve heard me say about where were tryingto go." He was very proud of his daughters keen mind and relied on her insights. "Daccord. Bernier is beautiful as well as intelligent, and in this industry that not only does butprobably should count, much as I hate to say it. Yangs nationality alone makes him an asset whenyoure trying to expand in Asia-to say nothing of his scientific skill. Lambert is creative andintensely charismatic, at least judging from the TV interviews Ive seen. He could help Pelletiersteam cohere again. And Yves... Yves is the perennial golden boy. How soon do you have to decide?" "Im meeting again with Daniel Reynard this afternoon, and then I thought Id go down to thecountry and think about it over the weekend. We should make up our minds by Monday. Will youcome with me?" he asked hopefully. Jasmine shook her head. "Sorry, Papa. I have to work." We All Know What "Leadership" Means Alain and his old friend got down to business right away. The polished antique table in front ofReynard held only the four files, and the two men went through them formally. Theyd alreadydiscussed the candidates thoroughly with the rest of the team; this was simply a wrap-up. "Elise Bernier," said Reynard. "Vice President of Marketing for Skin Care Products." A careermarketing executive, Bernier had held this job for three years, during which OIs growth in skin carehad doubled. Shed drawn on global anthropological studies to inform her market research, and hadan intuitive grasp of how the companys products, from anti-aging creams to sunscreens, mightdovetail with consumers lifestyles in both emerging and developed markets. Shed invigorated salesfor some mature products-including Insouciance, for which shed found a niche-and a number ofher launches were showing promising returns. Reynard held up Berniers competency-model checklist. He and the rest of the top team hadargued for weeks before settling on the 19 qualities it contained. At the end of that lengthy processtheyd agreed that the model was sound, thorough, and fair. "She gets high marks across the board for persistent, shows initiative, intelligent and insightful, andcustomer-satnrf," he said. "Her boss admires her accountability-he says, She delivers on her promisesand takes responsibility for her mistakes-but rates her lower on loyal (She sometimes seems to care moreabout her career than about the company). Her direct reports rate her highly on every quality but one:compassionate (l wish her heart were as great as her mind)." "At some point persistent turns into aggressive," Alain said. "And she seems ratheremotionless to me. Why do you suppose a beautiful woman like that is still single?" "Well, at least shell never be dragged off to Hong Kong," Reynard replied. Next they looked at Yang Jianguo, whose lab had developed two extremely successful productstailored to the Asian market. He was currently Country Manager of Deronde Internationals Chinesesubsidiary. Hed been serving as Vice President for Product Development Asia-Pacific when theprevious Country Manager was poached by a rival. Yang had been given the job despite misgivingsabout his ability to make the stretch from science and technology to general management. In the 184
  • Who is the Fairest of Them All? Choosing a Leader at Deronde International 409-113 months hed been Country Manager, hed quickly proved up to the challenge, and the Chinese subsidiary was now DIs fastest-growing business in emerging markets. "He scores very high with everyone on self-disciplined, results-driven, quality-Jocused, and committed," Reynard said. "Some of his people fault him for being too authoritarian (He expects his orders to be obeyed without question), but they acknowledge that he cares about their families." Yangs. boss, a French expatriate based in Singapore, had rated him much lower on shows mutual respect ("He summarily dismisses anyone elses ideas about the Chinese market") and demonstrates open communication and collaboration ("He holds his cards close to his chest; I think hes more of a solo operator than a team player"). "Id have to agree about the open communication," Alain said. "Im not always sure what the man is getting at. Once he told me that Jianguo means build the country. What did he mean by that? Does he put Chinas interests ahead of the companys? I have to wonder how loyal he is." Reynard simply shrugged and moved on. "Antoine Lambert, General Manager of Coeur Tendre." Lambert had turned his start-up into a € 20 million business when Deronde, frustrated by five years of trying but failing to enter the spa segment, had acquired it on Pelletiers advice. Since then he had increased Coeur Tendres revenues to € 100 million, in part by rescuing some of DIs moribund spa- product development projects. He was a true entrepreneur--creative, hands-on, and irreverent. His management approach was unconventional, but it was hard to argue with his success. "Strong on innovative and creative, demonstrates candor and integrity, shows mutual respect, demonstrates open communication and collaboration, and compassionate. Falls a little short on efficient (I wonder if hed spend his own money as freely as he seems to spend DIs) and accountable (His budgets can be so far off that theyre almost a joke). Hes taken some risks, and lost some money in the process. But he inspires his people; theyre intensely loyal to him, and some of their comments refer to shared values." "Takes risks isnt in the competency model," Alain said shortly. "And Im not sure its a good idea to get too chummy with people youre supposed to be leading." "Still, we should keep in mind what that consultant told us," Reynard replied, referring to the design phase of the performance-management system. "This company has plenty of managers; what we need is more entrepreneurial leaders." It was Alains turn to shrug. "That brings us to Yves Saurac," Reynard said. "Vice President of Product Development for Developed Markets. Your boy." Alain felt a flash of annoyance. Saurac shone on his own merits- there was no question about that. He had the longest experience in product development of the four, having played a role in many of DIs major product launches over the past 12 years. He was working on a whole range of air fresheners (Saurac preferred to call them "ambient fragrances") aimed at a fast-growing segment in Europe and North America. Just a year earlier hed had the idea of combining the two areas into one group--called Developed Markets-and it had since realized a cost savings of nearly 25%. Saurac was one of Rene Pelletiers direct reports. "Confident, loyal, action-oriented, efficient," Reynard read. "His peers and his subordinates like and admire him-he gets the highest average scores-but they rate him low on innouaiioe and creative (He still takes the old-school approach to product development). Pelletier gives him the highest possible score on demonstrates leadership." Reynard paused. "When we decided to put demonstrates leadership on our list two years ago ... " 5
  • -109-113 Who is the Fairest of Them All? Choosing a Leader at Deronde International Alain broke in impatiently. "Yes, yes, I remember your reservations. What, exactly, does thatmean? We all know what it means. We recognize it when we see it. Its what put us where we aretoday." His eyes rose to the two oil portraits on the wall-his father and his grandfather, bothhandsome, silver-haired, and impeccably tailored. He felt empowered by their unmoving gaze butalso strangely disconcerted. . "I must leave to meet my plane, Daniel," he said, risking briskly. "Well nail this down onMonday. Until then, au revoir." The Invisible Current At the airport in Bergerac, Alain picked up the car he kept there and drove to the little town ofBeynac, where five generations of Derondes had escaped to serenity and relative solitude. Nowadaysthose attributes were threatened in the spring and summer months by boaters, motorcyclists, andtourists whose vans crowded the narrow road between the town and the river. As he inched the carup the winding medieval street behind his house, a bright yellow montgolfier floated overhead, theroar of its flames too high up to be heard from the ground. Alain had never been tempted to ride in aballoon. Now he suddenly pictured Antoine Lambert aloft, waving as he drifted above Beynac castle. Once inside, he carried a glass of wine down to the terrace and sat watching the Dordogne flowby, narrow, sinuous, edged with fertile farrnlands-so restful. Once, summers ago, hed looked onbenignly from this very chair as Jasmine and Yves Saurac, his paddle held up out of the water, spedpast in a canoe, carried downstream by the nearly invisible current. Alain tried to picture YangJianguo sitting on this terrace, eating walnuts and foiegras. The image wouldnt jell. He leaned back and inhaled the scent of the dusky-red climbing rose on the stone wall behindhim, its uppermost branches now touching the second-story balcony. Persistent as well as beautiful, hethought-just like Elise Bernier. This was the very rose that had inspired Insouciance. It was much toostrong a fragrance for the Chinese market. But Deronde International was taking that challenge inhand, along with many others, and it would succeed. The company had plenty of talent. The creamamong his employees regularly rode Reynards system to the top, and the four supremely diversecandidates to succeed Pelletier were proof of that. Alain was confident that whatever decision he made would be the right one.6
  • Who is the Fairest of Them All? Choosing a Leader at Deronde International 409-113Exhibit 1 Deronde Internationals Leadership Competency Model Quality High-scoring Low-scoring [Intrapersonal] Confident Saurac Persistent Bernier Loyal Saurac Yang, Bernier Committed Yang Self-disciplined Yang Action-oriented Saurac Shows initiative Bernier Demonstrates leadership Saurac [Interpersonal] Demonstrates open communication and collaboration Lambert Yang Compassionate Lambert Bernier Shows mutual respect Lambert Yang Demonstrates candor and integrity Lambert [Business Related] Results-driven Yang Customer-savvy Bernier Quality-focused Yang Efficient Saurac Lambert Accountable Bernier Lambert [General Intelligence] Innovative and creative Lambert Saurac Intelligent and insightful BernierSource: Casewriter. 7
  • HARVARD BUSINESS SCHOOL 9-310-004 REV: JULY 20, 200~CLAYTON ROSEALOO SESIAWhat Happened at Citigroup? What we are doing is creating a model of the financial seroices company of the future, 1 -Sandy Weill, April 1998 In 1998,the Travelers Group (Travelers) and Citicorp merged to create Citigroup Inc., consideredthe first true global "financial supermarket," and a business model to be envied, feared andemulated. At year-end 2006 the firm had a market capitalization of $274 billion, with $1.9 trillion inassets and $24.6 billion in earnings. Ten years after the merger it ended in tears. In July of 2009, thefirm was effectively nationalized, with billions of dollars in bailout money converted into a 34%ownership stake for the US, government. Citigroup was worth less than $16 billion, having lost morethan $250billion in value from its peak. (See Exhibit 1 for Citigroups year-end market value, 1999-2008.) What went wrong?The First Financial Supermarket The October 8, 1998 merger of Travelers and Citicorp formed, at the time, the largest financialservices firm in the world with a market value of $155 billion and with assets of over $400 billion.Travelers was run by Sandy Weill, a legendary Wall Street figure, who after being ousted fromAmerican Express, bought a troubled Baltimore firm, Commercial Credit, in 1986 and in a series ofwell timed and well negotiated acquisitions bought the brokerage firm Smith Barney (1987), theinvestment bank Salomon Brothers (1997) and the insurance companies Primerica (1988) Travelers(1993),and Aetna Casualty and Surety (1996)to cobble together a firm with a market capitalization ofapproximately $15 billion at the end of 1997. Citicorp was one of the pillars of global banking, with adominant share of the corporate lending market and an innovative retail banking system; John Reed,Citicorps CEO at the merger, was responsible for developing the ATM. But Citicorp had a near deathexperience in the early 1990s, as a result, in large part, to having too many bad loans in thecommercial real estate sector. Its stock traded below $9 per share in 1991, and operated for a periodwith the active oversight of the Federal Reserve. The merger of Travelers and Citicorp was the brainchild of Weill, and was driven by his strongand long held belief in the potential of "cross-selling" -offering to customers a range of productsunder the same roof.2 If viable, the economics of the idea were compelling-little incremental cost toselling an additional product to a client. The merger created a company that provided an array ofSenior Lecturer Clayton Rose and Senior Researcher Aldo Sesia of the Global Research Group prepared this case. nus case was developed frompublished sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources ofprimary data, or illustrations of effective or ineffective management.Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. nus publication may not be digitized,photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
  • -,310-004 What Happened at Citigroup?financial services including commercial and investment banking, retail banking and consumerfinance (e.g., credit card lending), investments (e.g., mutual funds), securities brokerage, andinsurance. Consistent with Weills reputation as a savvy dealmaker, at the time of the merger it wasillegal for a single firm to be in both the banking and insurance businesses. The deal was struckassuming that the law would be changed, and if it could not be changed the new firm agreed itwould divest its property and casualty insurance business." The new company operated in 52 countries, though it did not offer all of its products and servicesin all countries. Citigroups 250,000 staff, for example, provided mortgages in Manhattan, loans inMalaysia, credit cards in Bahrain, and bond underwriting in Guatemala. Weill and Reed released thefollowing statement in 1998: Citicorp and Travelers Group bring together some of the best people in the financial services business, creating a resource for customers like no other-a diversified global consumer financial services company, a premier global bank, a leading global asset management company, a preeminent global investment banking and trading firm, and a broad-based insurance capability. Our ability to serve consumers, corporations, institutions, and government agencies, domestic and foreign, will be without parallel+ The merits of a financial supermarket were, at the time, not universally accepted. There weremany doubters within the business and academic communities.f Citigroup, after all, was not the firstcompany to aspire to be a large cross-selling financial services firm. In the late 1970s, AmericanExpress had been intent on becoming a global conglomerate, with huge, multifaceted businesses anddiversified income streams that could protect the company in the event of hard times in one of itscore businesses," American Express made several large acquisitions including Shearson LoebRhoades, First Data Resources, Trade Development Bank, Lehman Brothers Kuhn Loeb, andInvestors Diversified Services? The synergies between the subsidiaries did not, however, come topass. By 1985, American Express had revised its strategy: It shifted its focus to developing its corebusinesses while shedding its non-core activities+ For Weill building a "financial supermarket in which cross-selling would make the whole moreprofitable than the sum of its parts" had been a driving ambition of his since the early 1980s when hewas the second-in-command at American Express." Both Weill and Reed said the combinedcompanies expected to generate substantial incremental earnings from the significant cross-sellingopportunities that would be created as well as cost savings that would be realized.l? In the retailspace, cross-selling included plans to market investment products to its banking, insurance, andbrokerage customers; and selling banking products to its brokerage and insurance customers. In thewholesale space, Citigroup envisioned cross-selling commercial insurance lines, investment banking,lending, and 401(k} products to its corporate customer base.! Shortly after the merger, SallieKrawchek, an analyst at Sanford Bernstein who later became Citigroups CFO, argued that thepotential for cross-selling synergies was significant, and resided primarily in the retail areas and inEurope, where the "universal bank" model had been present for years.P Others were more skeptical.One analyst said, "no-one at Citigroup has ever been able to prove to me how these synergies(between banking and insurancejwill positively affect return on equity."13 In addition to cross-selling, the primary benefits of the merger were said to be diversification andcost savings. The merger was intended to create a global financial services company where weaknessin one division or region could be balanced by out-performance in another.l+ In a July 2002 interview,a The Bank Holding Act of 1965 (which required the separation of banking and insurance activities) was repealed in 1999 as adirect result of the Citicorp/Travelers deal.2
  • What Happened at Citigroup? 310-004Weill argued that Citigroups combination of consumer and investment services had particular meritas the bank expanded overseas. For example, by using local deposits to fund other activities, hemaintained, it could avoid the kind of cross-border exposures that had upended other lenders.P Oneanalyst estimated that in the first year of the deal, the firm was able to cut $2 billion of cost, withanother $1 billion of savings in the second year.l"Leadership Initially, Citigroup was led by co-CEOs Reed and Weill. They were joined in 1999 by former U.S.Treasury Secretary and former Goldman Sachs CEO Robert Rubin, and the three formed an "Office ofthe Chairman." Rubin had agreed to join the firm under the condition that he act as an advisor andhave no operational responsibilities. He would later describe his role as one where he was, "anexperienced senior person with no axe to grind."17 Weill and Reed had different management stylesand those styles had informed the cultures of the two organizations they led prior to the merger.Reed was known as a remote, hands-off leader.l" Weill, on the other hand, was volatile and loved thespotlight.? Travelers managers were lean and mean and willing to get their hands dirty; Citicorpmanagers preferred a think-tank atmosphere free of constant bottom-line pressures.P The mergerbrought change to the companys leadership below Reed and Weill. Nearly 80% of Citicorps mostsenior executives and 60% of Travelers top managers left within one year of the merger.s! By February 2000, Reed and Weill conceded to the board that operating the company under adual-CEO arrangement was not working. Reed wanted both men to retire together and a new CEObrought in. The board saw it differently and named Weill as the sole CEO, effective in April 2000.Weill at the Controls . The merger of Travelers and Citicorp had been considered the crown jewel of Weills long andsuccessful career on Wall Street and sealed his reputation as one of the greatest deal makers of hisgeneration. Early under Weills leadership, Citigroup seemed to be proving the merger logic right. In a 2001report, Putnam Lovell Securities stated that, "The benefit of diversity, clearly evident in Citigroupssecond quarter earnings, allowed the company to grow earnings 14% from a year ago compared to anaverage 15% drop among its large financial services peers."22 At that point in the companys history,cross-selling of financial products was already said to comprise up to 15% of total revenue.PAccording to a 2002 MOlley magazine article: Despite gale-force winds battering the financial services industry-bear market, recession, Sept. II, Enron, Argentina-Citi has grown earnings at a 17% annual clip over the past three years. More important, the company has rewarded shareholders with a 163% total return since the merger became official, trouncing Standard & Poors 500 as well as Citis biggest rivals in banking, brokerage and insurance.e In March 2002, however, Weill spun off Travelers property and casualty (P&C) division via anlPO. To some observers this was an indication that banking and insurance (specificallyproperty / casualty insurance) was not a good fit. An American Banker article stated, "Several financialservices analysts say they see no compelling rationale for banking and property/casualty insuranceto be gathered under one corporate umbrella. And Citigroups decision last month to spin off itsTravelers property/casualty unit truncated the only real-world financial supermarket, thoughCitigroup kept its life insurance operation.v-" 3
  • 310-004 What Happened at Citigroup? Weill had concluded that the P&C business would simply be more valuable on its own. "We driveour company to achieve, on average, double-digit earnings growth," he said at the time. "We didntfeel [Travelers P&C business] had the potential for top-line growth over a long period of time." Pluswhen Citigroup attempted to cross-sell home and auto insurance to its retail bank and brokeragecustomers, the strategy backfired. "The people who ended up taking our insurance policies werethose with the greatest risks," Weill explained. "We ended up losing a lot of money."26 "We thinkthat our shareholders end up better in having the companies split apart. And we think that when youwould look at Citigroup, you would see higher returns on equity and higher growth rates than whatweve seen over the last three years with the inclusion of [Travelers P&C business]."27 Theproperty / casualty business had proven an earnings laggard, generating annual returns on equity of15%, compared with 22% for Citigroup as a whole.28Weill said, "The spin-off netted Citi a $1 billiongain while also giving shareholders a better, more focused exposure to the P&C business.r-? While there ~as success in cross-selling lending and investment banking products to corporateand institutional clients, gains in the retail areas were more difficult. Some suggested that this wasdue to the flawed nature of the strategy; customers did not want to buy all financial products from asingle source. Others attributed the problems to poor execution by Citigroup, in particular a lack ofproper incentives for the various retail sales forces. In 2000, Weill asked both Charles Prince, thefirms general counsel and co-chief operating officer,and Todd Thompson, the CFO, to jump start thecross-selling effort in the retail areas, although neither of them had any formal authority over therelevant lines of business.P And Weill dismissed the need for proper incentives, suggesting thatpeople should, "think about doing the business first, and worry about who gets the credit second.r" While the cross-selling efforts were meeting with mixed success, Weills acquisition strategy wasfiring on all cylinders. Industry watchers found the companys acquisition process to be a "corecompetency" for Citigroup as a whole and major engine of its growth.P For example, he worked a2000 deal to acquire the UK investment bank Schroders PLC, and in 2001 acquired the second largestbank in Mexico, Grupo Financiero Banamex-Accival, for $12.5 billion. With each new deal, the firmwas able to generate incremental earnings from some combination of reducing" the acquired firmscost of capital (by using Citigroups cheaper funding), cutting costs and adding clients. In early 2001,Reed, who was no longer with the firm, gave a speech where he questioned the wisdom ofcontinuing growth by acquisition, "Ill tell you that Citigroup is right at the edge of how big thingscan be and be managed."33 The firm under Weill had not developed a distinct and common culture. Prince would later say, "Iused to joke that we dont have a good culture-we have five or six good cultures."34Weill was wellknown for his derisive view of the importance of culture, suggesting that it "sounds like youretalking about yogurt."35 Weills management style evolved, at least to some extent, during thisperiod. He had always been a "hands-on" manager who relied little on organization charts and had astrong aversion to meetings. At Rubins urging he began to bring a somewhat more structuredprocess to working with his subordinates, and to gathering and sharing information.w He was alsowell known for his aversion to the risks that came from large trading operations, especially those thatwere proprietary and not geared towards serving clients. He preferred business that generated stableand steady fees." By 2002, Citigroup had become embroiled in controversy surrounding its financing of Enron andits analysis of WorldCom-both involving Salomon Smith Barney (SSB).The U.S. government hadlaunched an investigation into SSBs business practices. In December 2002, Citigroup received a fineof $400 million for conflicts of interest between its research department and investment bank. (Twoyears later the company settled a class-action suit brought by WorldComs shareholders for $2.7billion.) In June of 2003, the corporate governance research group, The Corporate Library (TCL),4
  • What Happened at Citigroup? 310-004rated Citis board as the least effective of the 1,700 US companies it reviewed. The poor rating wasdriven in large part by TCLs view that the board lacked independence from Weill as demonstratedby his compensation (estimated at $14.5 million) in spite of significant ethical lapses. TCL also noted,and praised Reuben Mark, a Citi director and the CEO of Colgate-Palmolive, for not standing forreelection because of his concerns about a lack of adequate succession planning.38 By the end of 2003, Citigroup was generating $77 billion of revenues, up from $66 billion in 1999, $17.8 billion of earnings (from $11.2 billion in 1999), had $ 1.3 trillion of assets on its balance sheet. (from $902 billion) and a market capitalization of $250 billion (from $188 billion). (See Exhibits 2 and 3 for Citigroups Income Statement and Balance Sheet for 1999-2000, and Exhibit 4 for key rnetrics.)Prince Succeeds Weill In July 2003, Weill, recommended to the board that Chuck Prince succeed him as CEO. Therecommendation of Prince-then CEO of Citigroups Global corporate and investment bank-surprised many. Prince, a lawyer by training, began working with Weill in 1986 and eventuallybecame his "right hand man" in executing mergers and acquisitions. Weill also named RobertWillumstad, head of the consumer bank and long time loyal lieutenant, to be chief operating officer.In effect, Weill was naming Willumstad the pseudo co-CEO because of his operational experience,which Prince lacked and which was considered by many to be Princes chief handicap.s? Both menwould earn the same salary and compensation. . Prince, described as a "quiet man and consummate insider,"40 took over the top job in October2003. At the time Weill planned to stay on as chairman for two more years. Some suspected that Weillchose Prince because of the regulatory issues and lawsuits facing the company while others expectedthat Weill would continue to wield the true power within Citigroup. Weill had come under pressureto retire both due to his age (70) and the recent Wall Street scandals. An article in The Economiststated, "In naming Mr. Prince as his successor, Mr. Weill essentially put his lawyer in his place, whichis what people often do to resolve a transient problem.r+ A Financial Times article· said: "No matterhow forbidding the circumstances or how onerous or menial the task, Mr. Princes job has been tomake trouble go away for Mr. Weill."42New York Attorney General Eliot Spitzer acknowledged thatPrince played a pivotal and powerful role in negotiating a $1.4 billion settlement with 10 brokerages(including Citigroup) that had been accused of misleading clients with faulty stock research.P Upon taking the helm, Prince clearly stated that one of his main goals was to keep Citigroup outof the headlines. But a series of controversial business decisions at ground level in Japan, Europe, andagain in the. u.s. kept the company in the spotlight. (See Exhibit 5 for a list of Citigroups troubleswith regulators under Princes watch.) According to a Euroweek article written in October 2004: Citigroup may like to boast that the sun never sets on its sprawling global empire-and, indeed, this is true up to a point. However, the problem is that while the God-fearing and law- abiding Mr. Prince and his top New York managers are asleep, some Citigroup employees in a different time zone are up to all sorts of mischief.e At the time Prince became CEO, the company operated in 100 countries on six continents with275,000 employees.v The organization continued to focus on its diversification by both product andgeographic region. In its annual report for 2003, Citigroup stated that it received a record $15.5 billionin revenue from its cross-marketing initiatives (20% of the total). Still some of Weills own team members came to doubt the financial supermarket strategy. Aformer executive reflected: "We came to realize that instead of a financial supermarket we should 5
  • 310-004 What Happened at Citigroup?think of Citi more like a financial mall. Different sets of customers would come to buy differentproducts from a variety of outlets under the same overall umbrella.v= In February of 2005, the firmsold much of its life insurance business, Travelers Life & AIU1Uity, Metropolitan Life. to Prince stated his intention to move the company away from growth through acquisition and focuson internal, organic growth. Organic growth, however, would require much improved productinnovation as well as continued cost cutting. Moving the company away from acquisitions was astriking change in direction for Citigroup. Prince felt that financial institutions had become tooexpensive, making them a poor growth strategy. "We dont need to transform who we are," saidChief Financial Officer Todd Thomson, "We just have to think how to build out what we have."47Prince joked that Citigroup was already so large that, "The only way we could do a transformationalacquisition would be to buy Canada. "48 In the spring of 2005, Prince had laid out his four broad goals for the firm: 1) make Citigroup theworlds most respected financial firm; 2) grow the consumer business, 3) grow the internationalbusiness; and 4) make the corporate and investment bank best in class.t? (See Exhibits 6a and 6b forCitigroups net income by business segment and geography, 2001-2008, and Exhibit 7 for thecompanys competitive position in certain lines of business, 1999-2008.) Prince aimed to increaseCitigroups net income from international business to 50% in the future, up from 38% in 2002, andmuch of this was expected to corne from consumer financial services outside of the U.S. Citigroupbelieved the number of bankable households with a disposable income of more than $10,000 a yearwas expected to grow from 112 million to 122 million in the U.S. by 2008, while, internationally, thenumber of bankable households was expected to grow from 349 million to 415 million in the sameperiod. "You get a chance like this once in a generation," a Citigroup official told analysts.S Princestated publicly he expected the companys annual earnings to grow earnings by 10% or more." In late 2004 Prince and Willumstad started to reshape the companys senior management and itsorganization structure. They fired Thomas Jones, who ran asset management; Deryck Maughan, theformer Salomon CEO who headed international operations; and Peter Scaturro, CEO of the privatebanking group-all casualties of the companys problems with regulators in Japan. At one pointWeill had considered both Jones and Maughan for the CEO job.52Prince named Sallie Krawcheck aschief financial officer and moved former CFO Todd Thomson to run Smith Barney. Citigroups 2004 profit came in at $17 billion, which was a 5% drop from the prior year. The chiefculprit was a $4.95 billion charge to settle litigation over Citigroups role in touting WorldComsstock and to increase reserves for cases involving its role in financing Enron and other companies inthe dotcom bubble era. The company also took a $242 million charge for credit and trading lossesconnected to the collapse of Italys Parmalat. By 2004, Citigroup had paid or set aside in excess of $9billion for these settlements, more than wiping out its investment banking profits over the prior twoyears. Citigroups share price dipped 10% in 2004. That compared with a 2% slip in the value of JPMorgan Chase & Co. shares and the 5% gain posted by Bank of America Corp. At these prices,Citigroups stock traded at 10 times expected earnings, half the multiple that the shares fetched in thefirst few years after Citicorp and Travelers Group merged. In 2005, as part of an effort to boost earnings, Prince began to significantly increase Citigroupsrisk profile, which was apparently done in consultation with Rubin, who was reported to have saidthe view, "You have to take more risk if you want to earn more."53 Rubin was also said to havewarned that the increased risk-taking required robust controls and oversight.54An important area ofgrowth was in the creation, management, and sale of securitized instruments related to horne6
  • What Happened at Citigroup? 310-004mortgages, in particular collateralized debt obligations (CDOS).b Notwithstanding Rubinsadmonitions, risk controls at Citigroup appeared to be seriously inadequate. There was insufficientinvestment in systems, incorrect assumptions were built into the risk models, and there wasinappropriate segregation .of duties between those charged with overseeing .risk and those who hadrevenue responsibility and took the risk in the fixed income division. 55Lynn Turner, the former chiefaccountant for the Securities and Exchange Commission said, "If youre an entity of this size, if youdont have controls, if you dont have the right culture and you dont have people accountable for therisk that they are taking, youre Citigroup."56 The lack of proper controls extended beyond the trading room. In March of 2005, the US. FederalReserve prohibited Citigroup from making further acquisitions until management demonstrated thatit could properly manage the firm. The Fed said, in part; Given the size, scope, and complexity of Citigroups global operations, successfully addressing the deficiencies in compliance risk management that has given rise to a series of adverse compliance events in recent years will require significant attention over a period of time by Citigroups senior management and board of directors. The (Federal Reserve) Board expects that management at all levels will devote the necessary attention to implementing its plan fully and effectively and will not undertake significant expansion during the implementation period. The Board believes it is important that managements attention not be diverted from these efforts by the demands that mergers and acquisitions place on management resources. 57 At the same time, on March 1, 2005, Prince launched his "Five Point Plan," which included newstandards for training, development, compensation, and annual reviews, all designed to inspire andmonitor ethical behavior. Citigroup created a DVD sent to employees and journalists around theglobe. Within two months, Prince personally addressed some 45,000 employees in 11 town hallmeetings in 10 countries.f At the end of July 2005, Willumstad left to become CEO of American International Group (AIG). AFortune article attributed the move to Willumstad concluding that Prince was poor at both partneringand managing.t? Other top executives also left the company. For example, Marge Magner,chairwoman and CEO of the Global Consumer Group, left the company in October 2005 to pursue acareer change. On the exodus of talent, Prince said at conference that "half the people who used towork for Citi are at JPMorgan now."60 Prince did, however, bring in some new high-profileindividuals. For example, in November 2005 he hired James Wolfensohn, the former head of theWorld Bank, to advise senior management on global strategy and on international matters. Citigroup earnings surged to $24.6 billion in 2005, a 37.7% jump over 2003. However, its stockcontinued to hover at $50 per share reflecting lack of investor confidence due largely to upwardlyspiraling operating expenses, which had increased 15.3% from 2003 to 2005. In early 2006, Prince formed a 14-member business heads committee, a 34 member operatingcommittee, and a management committee of nearly 100 members, all to create greater oversight and amore cohesive corporate culture (including a company-wide code of ethics). Others felt that theb These securities were created when mortgage-backed securities were pooled into a special purpose company, and "trenches"(or slices) of obligations were created that were backed by the mortgages. Each tranche was designed to appeal to a differenttype of investor. The most senior- tranche had the first call on the pools cash flows, was rated AAA (the highest credit ratingavailable), and carried the lowest risk and return. Progressively lower rated, higher return, and higher risk tranches were alsocreated, including an equity tranche. The risk in each of the tranches and the rating that each obtained from the rating agencieswas determined in part by the assumed default rate of the underlying mortgages, which was based on the historical experienceof similar pools of underlying assets. 7
  • 310-004 What Happened at Citigroup?committees slowed decision making and hampered innovation. Many industry observers felt Princewas making necessary changes but the results would take time to bear fruit-time that Wall Streetmight not allow. One analyst gave Prince "points for making decisions that depress current resultsfor the benefit of long-term growth potential" but at the same time the analyst downgraded the stockfrom "buy" to "neutral.t"" To Weills dismay, Prince had leaned very little on the chairman.s- By mid-2006, Princes strategies were showing mixed results. The Fed saw enough "significant progress" in Citigroups internal controls to lift its ban on acquisitions= In the second quarter of 2006, revenues were up 9%, but expenses rose 15%. And only 2% of the cost increase was due to new. investments, such as building retail branches.s Saudi Prince Alwaleed bin Talal, the largest individual investor with a 4.3% stake in Citigroup worth more than $10 billion, told the Financial Times that the companys costs were out of control and that "draconian" measures would be required to curb expenses. He declared his confidence in Prince but he warned: "Im patient but enough is enough. "65 In response, Prince sent a memo to employees announcing that he had asked business heads to evaluate every line item and squeeze out "business-as-usual" costs for items as small as newspaper subscriptions. But he was vehement about not cutting investments to shortchange the future.66 Much of these future investments took the form of expanding retail banking outlets in locations where customers of. the companys Smith Barney brokerage lived, hoping to sell them banking products. In December 2006, Prince replaced Willumstad. He named Robert Druskin as chief operating officer and put him in charge of a comprehensive cost-cutting plan and told him to streamline computer systems and management groups, and move back offices to lower-cost areas of the US; Europe and Asia.s? Druskin, president and chief executive of Citigroups Corporate and Investment Banking unit at the time, had decades of operational experience In the industry. Druskin said that in the late 1990s and in the first part of the new decade, the company had "over-earned and underinvested."68 One analyst said, "He (Prince) inherited a gobbelgook of companies that were never integrated, and it was never a priority of the company to invest. The businesses didnt communicate with each other. There were dozens of technology systems and dozens of financial ledgers. "69 Citigroups 2006 revenues grew nearly 8% over 2005, but its net income fell 12% year-over-year. Expenses were up 12% in 2006 as the company invested aggressively in its organic growth objectives for the year, including opening an average of three bank branches each day.?? Despite the drop, Citigroups net income was $21.5 billion-the second highest annual earnings in its history. In the spring of 2007, Citigroup announced 15,000 job cuts (5% of its 327,000 employees) andfurther cost cutting that industry analysts predicted would mean $2 billion in cost savings. Princesaid that the company was pruning its core business portfolios to improve overall returns, but therewere no plans to either sell or spin-off the businesses." In addition, Prince said the company wasrethinking its investment strategy in international markets. While Citigroup had no plans to pull outof the 100 or so countries whereit operated, it would begin to concentrate on a smaller number ofcountries to build market share.? Prince also unveiled an effort to unify the disparate cultures, and torationalize the brand, under an internal "one Citi" campaign-an effort to use only the Citi nameexternally where possible, and the abandonment of the red umbrella logo that came from Travelers atthe merger in 1998.73 The first two quarters of 2007 were the companys best under Princes leadership. Net income forthe second quarter was up 18%. However, in the second half of 2007, Prince struggled to cut costs andgenerate new revenue. He continued investing in the expansion of retail outlets, but many industryobservers felt that the actions were too late in an already oversaturated market.8
  • What Happened at Citigroup? 310-004 In April of 2007, Citigroup bought the hedge fund Old Lane Partners (Old Lane), and brought intothe firms management the funds CEO, Vikram Pandit. Pandit had been head of the institutionalbusiness at Morgan Stanley, and had been mentioned as a candidate for Morgan Stanleys CEOposition. He left in 2005 after a messy and public battle with the former CEO, Philip Purcell. Old Lanewas founded by Pandit and another former Morgan Stanley executive, John Havens (who also joinedCitigroup), in 2006. Citigroup paid $800 million for the year old firm, which had $4.5 billion of assets.It was widely acknowledged that the deal was more about obtaining the services of Pandit thanbuying another newly minted hedge fund. Pandit reportedly received in excess of $165 million fromthe sale, of which $100 million was to be reinvested in the hedge fund until 2011. Pandit, who grewup in Mumbai, India, came to the u.s. as a teenager, and held a doctoral degree in finance fromColumbia University. He was named to run Citigroups Alternative Investment unit.74 By the spring of 2007 the realities of a declining housing market had finally caught up with thebroader financial markets. In August 2007, two hedge funds managed by Bear Steams that investedin mortgage related securities failed. This began a precipitous decline in the value of mortgagerelated securities, which had a profound effect on the profitability of Wall Street firms that heldsignificant amounts of these securities in inventory, and it marked the start of the historic crisis that.would grip the financial markets and global economy. On October 1, 2007 the Citigroup took the unusual step of pre-announcing third quarter earningstwo weeks early. Citigroup warned investors that because of the mortgage crisis and its effects on thequality of credit and value of securities more broadly in the third quarter, it would write-downinclude approximately $1.4 billion on highly leveraged financing commitments, and $1.3 billion insubprime mortgage holdings, as well as take a charge of $2.6 billion for future losses in consumercredit. Amid some discussion about Princes future as CEO, Rubin said, "I think Chucks going to behere for a lot of years."75 (See Exhibit 8 for Citigroups Significant Risk Exposures, 2007-2008.) On October IS, Citigroup reported a profit of $ 2.2 billion for the third quarter, down 58% from ayear earlier. The significant write-downs and losses were much in line with what was announced onOctober 1". Citigroup also noted that expenses for the quarter had increased by 22%. As part of areorganization to spark revenue growth, Prince announced that Citigroups Investment Bank andAlternative Investments units would be merged and headed by Pandit, and be called the InstitutionalClient Group. 76 On November 4,2007 Citigroup announced Prince was stepping down as chairman, and the firmwould take an additional $8 billion to $11 billion in write-downs in the fourth quarter. Princeresigned, saying in a memo to employees, "I am responsible for the conduct of our businesses." Hecontinued, "The size of these charges makes stepping down the only honorable course for me to takeas chief executive officer."?" He resigned five days after Merrill Lynch & Co. ousted CEO StanleyONeal following an $8.4 billion write-down that was more than 50% greater than the bank hadforecasted.F The Securities and Exchange Commission also opened an investigation into Citigroupsaccounting practices related to those losses. The mortgage crisis, and its effects on asset values and the availability of credit, had created twosignificant problems for Citigroup, both stemming from the trading areas within its investmentbanking business. First, as a market leader in the issuance of CDOs, Citi held substantial subprimeand mortgage related positions on its balance sheet, creating the potential for substantial losses as themarkets for mortgage related securities collapsed. (See Exhibit 9 for CDO league tables.) On its thirdquarter earnings call.with analysts, Citigroup reported that its exposure to subprime assets in itsCDO positions was less than $13 billion. On November 5, the company reported that its subprimeexposure through COOs was $55 billion. The higher number included $43 billion of "super senior"COO exposure, which had as its underlying assets subprime residential mortgaged-backed 9
  • 310-004 What Happened at Citigroup?securities." Citigroup apparently had believed that the "super senior" ranking of its portion of theseCOOs insulated the company from the decline in the subprime market, and therefore managementhad not included them in their earlier subprime exposure estimates. As the rating agenciesdowngraded many of the mortgaged backed securities and COOs in October, the securities valuesdeclined, resulting in the additional estimated loss to Citigroup of between $8 and $11 billion. (SeeExhibit 10 for Citigroups exposure to subprime mortgages, Q3 2007-Q4 2008.) In addition, Citigroups substantial involvement with structured investment vehicles (SIVs) waspresenting the firm with major challenges. As described in Citigroups September 2007 10-Q: SIVs are special purpose investment companies that seek to generate attractive risk- adjusted floating rate returns through the use of financial leverage and credit management skills, while hedging interest rate and currency risks and managing credit, liquidity and operational risks. The basic investment strategy is to earn a spread between relatively inexpensive short-term funding (commercial paper and medium-term notes) and high quality portfolios with medium term duration, with the leverage effect providing attractive returns to junior note holders, who are third party investors and who provide the capital to the SIVs. Citigroup has no contractual obligation to provide liquidity facilities or guarantees to any of the Citi-advised SIVs and does not own an equity position in the SIVs. At the end of the third quarter, the total asset value of Citi-managed SIVs was $83 billion acrossseven entities, down from $100 billion at mid-year. Only a tiny fraction of the SIV assets were relatedto subprime mortgages; the problem lay with the funding arrangement. As the crisis caused thecredit markets to freeze, the SIVs faced significant difficulty refinancing the commercial paperfunding, raising the specter of having to repay the commercial paper lenders. Because the marketswere in crisis, investors were not buying many assets, leaving Citigroup potentially unable to sellenough SIV assets to repay the commercial paper lenders. While not under a legal obligation to fundthe SIVs (which would have required Citigroup to put the assets and liabilities on its balance sheet,detrimentally affecting the firms capital position), Citigroup was faced with some implicit obligationto assist clients that had purchased the SIV assets, as well as the potential for affecting the broaderfinancial system if it tried to force the sale of significant amounts of assets at a difficult rnoment.?? Princes departure hastened calls to break up the company. Citigroup shares fell 32% in 2007, andhad declined by 17% since Prince became CEO in October 2003. Rubin, who had chaired Citigroupsexecutive committee, was named chairman. Sir Win Bischoff, who ran Citigroups Europeanoperations, was named acting CEO while a board committee sought a new leader for the firm.Pandit Replaces Prince In December 2007, Citigroups board appointed Pandit to succeed Prince as the companys CEOand named Bischoffas chairman. Rubin described Pandit as the "best athlete" among the candidatesfor the job.sO Some major shareholders wanted Willumstad to return as the new CEO. Willumstadwas interested and made a presentation to the search committee. Willumstad argued that Citigroupsconsumer and corporate businesses did little for each other. "The stock market," he remarked, "hasbeen saying for years that it doesnt like Citis business model. If you were interested in me for thisC Gary Crittenden, Citigroups CFO, explained on November 5 that $25 billion of this exposure to subprime came in the form of"liquidity puts" that Citigroup wrote to clients that bought the "super senior" tranches of these CDOs. Because the puts wouldbe used by the clients to sell back these securities when the value of underlying subprime mortgages fell, Citigroup had thesame economic exposure to the subprime market as if it had owned the COOs.10
  • What Happened at Citigroup? 310-004job, you would have to tell me you would seriously consider breaking this company up." Willumstadbelieved he shocked the committee.81 On December 13, just two days after Pandit assumed the CEO role, Citigroup announced that itwas placing the assets and liabilities of seven SIVs, valued at $49 billion, on its balance sheet. Theassets in the SIVs had been reduced from $87 billion in August through sales, and the firm said thatalmost none of the remaining assets were related to subprime mortgages. This action provided anexplicit acknowledgement that Citigroup would be providing the funding for the structures toprevent the SIVs forced liquidation at potentially draconian values. The action followed a failedattempt by the Ll.S.Treasury to create an industry wide "super SIV" that would take assets from suchentities at a number of firms, and also the decision by other banks to bring similar vehicles onto theirbalance sheets.F Citigroup reported a loss of $9.83 billion for the fourth quarter of 2007, including $18 billion ofsubprime related write-downs, and $4.1 billion in increased credit costs. For the full year, the firmgenerated $3.6 billion in earnings, down 83% from $21.5 billion in 2006. It had $37.3 billion insubprime related assets on its balance sheet, and $133.4 billion in Level 3 assets. Its Tier 1 capital ratiowas 7.12%, while its TCE/TA ratio stood at 2.72%. (See Exhibit 11 for Citigroups mark-to-marketasset values under FAS 157 for year end 2007 and 2008.) Industry analysts largely felt that although Pandit was well equipped to tackle Citigroupsinvestment banking problems, his inexperience in consumer banking "could be a disadvantage asbanks stand at the doorstep of a credit cycle, and given that the Global Consumer businessescontribute 50% to 60% of Citigroups consolidated net income."83 Upon accepting his new position,Pandit expressed his intent to focus Citigroup on identifying and investing in the best growthopportunities, and he committed to conducting "an objective and dispassionate" review of the banksbusinesses. Many took the latter comment to indicate openness to splitting Citigroup into smallerunits. According to the same analyst, "We would not be surprised if following his review certainbusinesses were either sold or restructured. A sale of businesses could also serve as a much neededsource of capital."84 Reflecting on all that had happened to Citigroup, Reed described the merger as a "mistake" andimplied that the business model was to blame.85 Weill responded that poor execution drove the poorresults. "And," he said, "I get an F for succession planning."86 Ken Lewis, the CEO of Bank ofAmerica, said in an interview that, "Citis problem (in US and international retail banking) was beingunimportant in many places."87 Looking forward Pandit described three key steps he deemed critical to stabilizing Citigroup. Firstwas the need to raise capital. In the first half of 2008 Citigroup raised over $33 billion in capital. Inaddition, Pandit slashed the dividend by 41 %. Second, he wanted to make sure that the firm retainedits key employees, and arranged for the bonuses for 2007 work (paid in early 2008) to be determinedas if the firm had not had losses. Finally, he said he needed to protect the firm from the adverseeffects of the remaining toxic assets on the balance sheet, saying "Weve got to ring fence these assets.Weve been completely focused on bringing these down and managing them as well as we can forour shareholders.tf By May 2008, Pandit had decided he would not split Citigroup, but instead would retain theuniversal bank model, based on four key global products: credit cards, wealth management,corporate banking, and investment banking.s? He would also focus on significantly reduceCitigroups expenses. 11
  • 310-004 What Happened at Citigroup? During the first half of 2008,the firm lost $8 billion, with write-downs on mortgage related assetstotaling about $16.5 billion, and increased credit costs for the derivatives book of $7.6 billion.Citigroup had reduced head count by 11,000,and had sold some small pieces of the firm. Some wouldlater suggest that Pandits cerebral, low-key management style and uninspiring public speaking hadfailed to lift morale among Citigroups 350,000employees, while his propensity to rely on an innercircle of aides from Morgan Stanley, his former employer, had alienated many long-time Citigroupexecutives.?" In September, the crisis in the financial markets came to a boil. Mortgage giants Fannie Mae andFreddie Mac were put under government conservatorship, Lehman Brothers filed for bankruptcy (thelargest in U.S, history), Merrill Lynch sold itself to Bank of America to avoid Lehmans fate, GoldmanSachs and Morgan Stanley became bank holding companies, and AIG effectively sold 80% of itself tothe U.S. government to prevent its failure. The Reserve Fund, the nations oldest money market fund,"broke the buck" because it owned significant amounts of worthless Lehman Brothers commercialpaper, causing significant concern, about the risk of a "run" on other money market funds. Similarproblems were occurring overseas. . On September 29, Citigroup bid $2.2 billion, or $1 per share, for the banking assets of WachoviaCorporation, which was about to fail. The Federal Deposit Insurance Corporation (FDIC) haddetermined that the failure of Wachovia would represent a risk to the broader financial system; toforestall this event the agency initially encouraged Wachovia to accept Citigroups offer, which it did.For Citigroup, it was a transaction that would both demonstrate its viability and significantly expandits U.S. retail footprint. While it would have to take a loss from writing down Wachovias assets, andwould need to raise at least $10 billion in new capital, Citigroup would receive assistance from theFDIC to protect the value of Wachovias asset. Wells Fargo had initially expressed interest inWachovia, but then dropped out of the discussions. However, within a few days of the agreement,while Citigroup and Wachovia were negotiating the details of the transaction, Wells returned with a$7 per share bid for the entire company, which it could acquire without FDIC assistance. OverCitigroups protest (and later lawsuits), and apparently with some encouragement from the FDIC,Wachovia accepted Wells Fargos offer.?! With an appetite among global market participants for cash and liquidity that was virtuallyinsatiable, and fears that assets of every type were worth far less than their stated values, the creditmarkets froze in October. Financial firms were unwilling to lend to one another at almost any price.In an effort to restore some confidence in the financial system, the U.S. government implemented theTroubled Asset Relief Program (TARP). TARP allowed the US. Treasury to purchase up to $700billion of bank capital, in the form of preferred stock." On October 13, the CEOs of the nine largestUS. financial firms, including Pandit, were called to the U.S. Treasury and told that they had toaccept the governments money. Citigroup received a $25 billion investment. In late November, afterthe government reviewed Citigroups books, another $20 billion was invested, and the governmentprovided guarantees on $301 billion (after a first loss of $29 billion) of Citigroups $2 trillion in assets.Citigroup issued another $7 billion in preferred stock, as well as warrants, to compensate the U.S.Treasury and FDIC for the guarantee. The dividend was virtually eliminated. One money managersaid, "This is chemo. They need this capital to stay alive."n Some laid the necessity for thegovernment bailout squarely at Pandits feet. "He didnt go into crisis mode early enough, or at leastit wasnt obvious," said one academic. "It should have been a more aggressive reduction of risk 11months ago. "93d The government used preferred stock to avoid taking direct ownership in the firms and creating the impression that thebanks were being nationalized.12
  • What Happened at Citigroup? 310-004 In the fourth quarter of 2008, the firm lost $8.3 billion. Over the full year, it lost $18.7 billion. In thefinal quarter, Citigroup took write-downs on mortgage related assets of $5.6 billion, increased creditcosts for derivatives by $6.1 billion (following a $4.9 billion increase in the third quarter) andallocated an additional $6 billion to its allowance for loan losses (following a $3.9 billion allocation inthe third quarter). (See Exhibit 12 for Citigroups derivative exposures 2005-2008.) At the end of thequarter Citigroup restated its earnings, taking an additional charge of $9.9 billion on an impairmentto goodwill from the declining value of Nikko Asset management. Headcount had been cut by 52,000since the beginning of 2008, and the expense run-rate had been reduced by 14%. Tier 1 capital stoodat 11.92% and TCE/TA was 1.56%. In January 2009, both board chairman Bischoff and Rubin retired. According to some industry watchers, "(Rubins) tenure at Citi has tarnished the reputation he built as a talented, nimble leader at _.the head of Goldman Sachs and as Secretary of the Treasury for the Clinton administration." In his resignation letter, Rubin wrote "[my] great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today."94 As a result of the shake-up of Citigroups board, Richard Parsons, the former CEO of TimeWarner, became chairman. Pressure on Pandit to turn around the company intensified. In rnid-January, Pandit announced plans to split Citigroup into two units-effectively breaking up thesupermarket model it had been trying to make work over the past decade.t" Reports in the WallStreet Journal indicated that Citigroup planned to reduce the size of the company by one-third. Aspart of this initiative, Citigroup announced on January 14, 2009 plans to split off its Smith Barneyretail brokerage into a joint venture with Morgan Stanley.96This deal provided Citigroup with $2.7billion of badly needed cash. As this news emerged, Citigroup shares fell to $5.08. 97"For Citi, thejoint venture provides significant synergies and scale, substantially reduces our expenses and enablesus to retain a significant stake in a company that immediately becomes the industry leader with realgrowth opportunities," said Pandit.f In February 2009, Pandit responded to ongoing criticism from investors, Congress and the generalpublic by vowing to accept only $1 in salary with no bonuses until Citigroup returned to profitability.Considerable anger stemmed from on the companys purchase of a $50 million jet after acceptingfederal bail-out funds. "We hold ourselves accountable and that starts with me," Pandit told theHouse Financial Services Committee. "We did not adjust quickly enough to this new world," headded. "1 get the new reality and I will make sure Citi gets it as well."99 In the first quarter of 2009 the firm generated $1.6 billion of earnings on $24.8 billion in revenues:The Institutional Clients Group business was the key contributor to earnings, with $2.3 billion in netincome, while the Consumer Group lost $1.2 billion. Since the beginning of 2008, Citigroup hadreduced its exposure to toxic assets by 47%, to $101.5 billion, had decreased its expense run rate by23%, and downsized its headcount by 16% to 309,000.100 On June 10,2009 Citigroup announced that it would convert and swap $58 billion of preferredshares for common stock in an effort agreed upon with US, regulators to bolster the firms tangiblecapital. As a result of the action, the U.S. government would own 34% of the firm. On the same day,the chairman of the FDIC, Sheila Barr, reportedly told Citigroups board that she remained concernedabout Pandits lack of lending and commercial banking experience. The Administration of U.S.President Barack Obama appointed a "compensation czar" with broad powers to oversee theexecutive compensation at seven firms that required extraordinary government assistance, includingCitigroup.l" 13
  • 310-004 What Happened at Citigroup?Exhibit 1 Citigroups Market Value at Year End, 1999-2008 $300 $273.7 1 $259.7 i $250.3 $250.0 $245.5 $250 j $229.4 I ~ $200 i $187.8 $181.1 j 1 ~ I $146.6 Iia Year End I co $150 ~ Market ValUj ~ i L_ I ::) $100 i $50 1 % $36.6 • $O~~~~~~~~~~-L~~~~~~~-L-L~J--L~~~~~L, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Casewriter, data from Thomson ONE Banker.iaccessed June 2009.14
  • 310-UO-i -15-Exhibit 2 Citigroup Income Statement, 1999-2008 (US$ millions, except per share amounts) Year Ended December j1 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Revenues Interest revenue $106,655 $121,429 $ 93,611 $75,916 $63,631 $- $- $- $111.826 $94.396 Interest expense 52.963 76.051 55.683 36,676 22,004 17.271 21.248 4,463 36.638 28.674 Net interest revenue 53.692 45.378 37.928 39.240 41.617 Commissions and fees 11.227 20.706 18.850 3,132 2,726 16,314 15.258 15.593 16.363 13.229 Principal transactions (22.188) (12.086) 7.990 17.143 15.981 5,120 4,513 5,544 5.981 5.160 Administration and other fiduciary fees 8.560 9.132 6,903 6,443 3,716 5,665 5.146 5,389 5.338 4.164 Realized g~ins (losses) from sales of investments (2,061) 1.168 1,791 6.119 5.524 510 (485) 237 806 541 Insurance premiums 3,221 3,062 2,769 1.962 833 3,749 3,410 3,450 12,429 11.504 Other revenue 342 11.135 10.096 9,603 9,238 6.308 5,775 4,463 Total non-interest revenues (899) 33,117 48,399 44,402 38.018 Total revenues, net of interest expense 52.793 78,495 86,327 83.642 79,635 77,442 71,308 67,367 75.188 65.722 Provisions for credit losses and for benefits and claims Provision for loan losses 33,674 16.832 6.320 7,929 6.233 8.046 9.995 6.800 5,339 4.760 Policyholder benefits and claims 1,403 935 967 867 864 3,895 3,478 3,520 10.147 9,120 Provision for unfunded lending commitments (363) , 150 250 250 Total provision for credit losses and for benefits and claims 34,714 17.917 7,537 9.046 7.117 11,941 13,473 10,320 15,486 13.880 Operating expenses Compensation and benefits 32,440 33,892 29,752 25,772 22,934 21,288 18,650 19,449 18.663 16.169 Net occupancy 7,125 6,648 5,794 5,141 4,791 4,280 4.005 3,735 Technology/communication 4,897 4,511 3,741 3,524 3.518 3,414 3.139 3.068 Advertising and marketing 2,292 2,803 2,471 2,533 2,653 Insurance underwriting, acquisition, operation - - - - - 1.063 992 1,115 3,643 3,765 Restructuring 1,766 1,528 - - - (46) (15) 454 759 (53) Other operating 22,614 10,420 8,543 8.193 15,886 9,169 10,527 8,707 15.524 13,810 Total operating expenses 71,134 59,802 50,301 45,163 49,782 39,168 37,298 36.528 38,559 33.691 Income (loss) from continuing operations before income taxes and minority interest (53,055) 776 28,489 29,433 22,736 26,333 20,537 20,519 21,143 18.151 Provision (benefit) for income taxes (20,612) (2,498) 7,749 9,Q78 6,464 8,195 6,998 7.203 7,525 6,530 Minority interest, net of taxes (349) 285 289 549 218 285 91 87 99 251 Income (loss) from continuing operations (32,094) 2,989 20,451 19,806 ·16,054 17,853 13,448 13.229 13.519 11.370
  • 310-004 -16- Year Ended December 31 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Discontinued operations Income from discontinued operations 1,478 925 1,177 908 1,446 - 965 1,378 Gain on sale 3,139 - 219 6,790 - - 1,270 Provision (benefit) for income taxes and minority interest, net of taxes 207 297 309 2,866 454 - 360 323 Income from discontinued operations, net of taxes 4,410 628 1,087 4,832 992 - 1,875 1,055 Net income (loss) ($27,684) $3,617 $21,538 $24,589 $17,046 $17,853 $15,276 $14,126 $13,519 $11,243 Basic earnings per share" Income (loss) from continuing operations (6.42) $0.60 $4.17 $3.90 $3.13 $3.49 $2.63 $2.61 $2.69 $2.26 Income from discontinued operations, net of taxes 0.83 0.13 0.22 0.95 0.19 - 0.37 . 0.21 - Net income (loss) per share" ($5.59) $0.73 $4.39 $4.84 $3.32 $3.49 $2.99 $2.79 $2.69 $223 Weighted average common shares outstanding 5,265.4 4,905.8 4,887.3 5,067.6 5,107.2 5,093.3 5,078.0 5,03.7 4,977.0 4,979.2 Diluted earnings per shareb Income (loss) from continuing operations ($6.42) $.059 $4.09 $3.82 $3.07 $3.42 $2.59 $2.55 $2.62 $2.19 Income from discontinued operations, net of taxes 0.83 0.13 0.22 0.94 0.19 - 0.36 0.20 - - Net income (loss) per share? ($5.59) $0.72 $4.31 $4.75 $3.26 $3.42 $2.94 $2.79 $2.62 $2.17 Adjusted weighted average common shares .outstanding 5,795.1 4,995.3 4,986.1 5,160.4 5,207.4 5,193.6 5,166.2 5,147.0 5,122.2 5,127.8SOUIce: Adapted from Citigroups 2008 lO-K report, p. 116; 2006 lO-K report, p. 104; 2004 10-K report, p. 106; 2003 lO-K report, p. 102; 200110-K report, p. 80.a Includes the effects of accounting changes.b Diluted shares used in the diluted EPS calculation represent basic shares for 2008 due to the net loss. Using actual diluted shares would result in anti-dilution. ~
  • ) ) 310-004 -17-Exhibit 3 Citigroup Balance Sheet 2000-2008 (US$ millions, except shares) December31 2008 2007 2006 2005 2004 2003 2002 2001 2000 Assets Cash and due from banks (including segregated cash and other deposits) $29,253 $38,206 $26,914 $23,632 $23,556 $21,149 $17,326 $18,515 $14,621 Deposits with banks 170,331 69,366 42,522 31,645 23,889 19,777 16,382 19,216 16,164 Federal funds sold and securities borrowed or purchased under agreements to resell, at fair value 184,133 274,066 282,817 217,464 200,739 172,174 139,946 134,809 105,877 Brokerage receivables 44,278 57,359 44,445 42,823 39,273 26,476 25,358 35,155 25,696 Trading account assets 377,(?35 538,984 393,925 295,820 280,167 235,319 155,208 144,904 132,513 Investments 256,020 215,008 273,591 180,597 213,243 182,892 169,513 160,837 120,122 Loans, net of unearned income Consumer 519,673 592,307 512,921 454,620 435,226 379,932 337,681 244,159 228,879 Corporate 174,543 185,686 166,271 128,883 113,603 98,074 110,124 147,774 138,143 Loans, net of unearned income 694,16 777,993 679,192 583,503 548,829 478,006 447,805 391,933 367,022 Allowance for loan losses (29,616) (16,117) (8,940) (9,782) (11,269) (12,643) (11,101) (10,088) (8,961) Total loans, net 664,600 761,876 670,252 573,721 537,560 465,363 436,704 381,845 358,061 Goodwill 27,132 41,053 33,415 33,130 31,992 27,581 26,961 Intangible assets (other than MSRs) 14,159 14,307 15,901 14,749 15,271 13,881 8,509 Reinsurance receivables 4,783 4,577 . 4,356 12,373 10,716 Separate and variable accounts 32,264 27,473 22,118 25,569 24,947 Mortgage servicing rights (MSRs), at fair value 5,657 8,380 Other assets, at lair value 165,272 168,875 100,936 80,456 81,364 67,370 75,209 118,227 93,493 Total assets 1,938,470 2,187,480 1,884,318 1,494,037 1,484,101 1,264,032 1,097,590 1,051,450 902,210 Liabilities Non-interest-bearing deposits in U.S. offices 60,070 40,859 38,615 36,638 31,533 30,074 29.545 23,054 21,694 lnterest-bearinq deposits in U.S. offices, at fair value 229,906 225,198 195,002 169,277 161,113 146.675 141,787 110,388 58,913 Non-interest-bearing deposits in offices outside the U.S. 37,412 43,335 35,19 32,614 28,379 22,940 21,422 18,779 13,811 Interest-bearing deposits in offices outside the U.S., at fair value 446,797 516,838 443,275 353,299 341,056 274,326 238,141 222,304 206,168 Total deposits 774,185 $826,230 $712,041 $591,828 562,081 474,015 430,895 374,525 300,586 Federal funds purchased and securities loaned or sold under agreements to repurchase, at fair value 205,293 304,243 349,235 242,392 209,555 181,156 162,643 153,511 110,625 Brokerage payables 70,916 84,951 85,119 70,994 50,208 37,330 22,024 32,891 15,882 Trading account liabilities 167,478 182,082 145,887 121,108 135,487 121,869 91,426 80,543 85,107 Contractholder funds and separate and variable accounts 68,801 58,402 49,331 48,932 44,884 Insurance policy and claims reserves 19,177 17,478 16,350 49,294 44,666 Investment banking and brokerage borrowings 25,799 22,442 21,353 14,804 18,227
  • 310-004 -18- --- December31 2008 2007 2006 2005 2004 2003 2002 2001 2000 Short-term borrowings, at fair value 126,691 146,488 100,833 66,930 30,968 36,187 30,629 24,461 51,675 Long-term debt, at fair value 359,593 427,112 288,494 217,499 207,910 162,702 126,927 121,61 111,778 Other liabilities, at fair value 92,684 102,927 82,926 70,749 64,824 48,380 53,142 62,486 47,654 Citigroup or subsidiary-obligated mandatorily redeemable securities of subsidiary trusts holding solely junior subordinated debt securities of - Parent - 5,217 4,657 4,850 2,300 - Subsidiary - 840 1,495 2,275 2.620 Total liabilities 1,796,840 2,074,033 1,764,535 1,381.500 1.374.810 1.264.032 1,166,018 970,203 836,004 Stockholders equity Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 70,664 - 1,000 1,125 1,125 1,125 1,400 1.525 1,745 Common stock ($0.01 par value; authorized shares: 15 billion) 57 55 55 55 55 55 55 55 54 Amount paid-in capital 19,165 18,007 18,253 17,483 18.851 17,531 17,381 23,196 16.504 Retained earningsa 86,521 121,769 129,267 117.555 102,154 93,483 81,403 69,803 58,862 Treasury stock, at cost (9,582) (21,724) (25,092) (21,149) (10,644) (11,524) (11,637) (11,099) (10,213) Accumulated other comprehensive income (loss) (25,195) (4,660) (3,700) (2,532) (304) (806) (193) (844) 123 Unearned compensation (1,946) (1,850) (1,691) (1.389) (869) Total stockholders equity 141,630 113,447 119,783 112,537 109,291 98,014 86,718 81,247 66.206 Total liabilities and stockholders equity $1,938,470 $2.187.480 $1.884.318 $1.494.037 $1.484,101 $1,264,032 $1,097,590 $1.051,450 $902.210Source: Adapted from Citigroups 2008 lO-K report, p. 117; 2006 10-K report, p. 105; 2004 lO-K report, p. 107; 2003 lO-K report, p. 103; 200110-K report, p. 81.aCitigroups opening Retained Earnings balance was reduced by $151 million to reflect a prior period adjustment to Goodwill. This reduction adjusted Goodwill to reflect a portion of the losses incurred in January 2002, related to the sale of an Argentinean subsidiary of Banamex that was recorded as an adjustment to the purchase price of Banamex. There was no tax benefit and no income statement impact from this adjustment.
  • 310-00-1 -19-Exhibit 4 Citigroup Key Metrics, 1999-2008 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Average deposits (US$ billions) $288 $276 $237 $232 $214 $349 $348 $298 $249 $215 No. of Branches 7,730 8,247 7,826 7,237 6,690 3,050 3,125 NA NA NA Allowance for loan losses 4.27% 2.07% 1.32% 1.68% 2.05% 2.64% 2.48% 2.48% 2.33% 1.87% Value at Risk (VAR) (US$ millions) $292 $142 $99 $109 $101 $80 $66 $63 $52 NA Tier 1 capital 11.92% 7.12% 8.59% 8.79% 8.74% 8.91% 8.47% 8.42% 8.38% 8.87% Total capital 15.70% 10.70% 11.65% 12.02% 11.85% 12.04% 11.25% 10.92% 11.23% 11.32% Leverage 16.45X 24.81X 19.38X 18.69X 19.23X 17.99X 17.64X 17.73X 16.75X 15.13X Tangible Common Equity (TCE) / 1.56% 2.72% 3.79% 4.39% 4.24% 4.53% 4.69% 7.58% 7.14% NA Tangible Assets (TA) Approximate number of employees at year end 323,000 375,000 327,000 296,000 283,000 253,000 255,000 272,000 242,000 180,000Source: Adapted from Citigroups 1999-2004, 2006, and 2008 10-K reports and Citigroup Financial Snapshot at http://www.citigroup.com/citi/fin/data/snapshot0903.pdf?ieNocache=902, accessed July 9, 2009.
  • ~310-004 What Happened at Citigroup? 1 • -. IExhibit 5 Regulatory Troubles under Princes Reign 1 1Date Geography Charges Outcome I2003 Japan Japan FSN investigates Citigroups Investigation turned up many issues: failures I private bank for complaints of to disclose risk, unfair transactions, and "gouging" unauthorized sales, making loans used by customers for stock manipulation, helping customers misrepresent their profits, and failing to perform criminal background checks on new clients. 1022004 Japan Issues with both private banking and Japans FSA revoked the private banks accusations that Nikko Salomon license and it was closed down. Smith Barney, a Citigroup joint venture, of manipulating stock prices.2004 Europe Citigroups European government Investigations in the U.K, Germany, Italy, bond trading desk earned about France, Spain, Portugal, Greece, and Belgium. $18.2 million in profits when its Results: penalty payment of $7.3 million in the traders sold euro zone bonds at U.K., case dismissed for lack of evidence in artificially high prices created by the Germany, Eurex (the Europe Exchange) traoers.l disciplinary committee cleared Citigroup but instituted a small fine, MTSb appeals board ruled that Citigroup breached a number of rules. Citigroup had to return the profits he generated by the trade.2004 Italy Parmalat scandal included allegations Charge to fourth-quarter earnings stemmed of corporate fraud. from $689 million of total exposure to Parmalat.Source: Casewriter.a Japans Financial Services Agency (FSA) was responsible for ensuring the stability of Japans financial system, and protection of depositors, insurance policyholders and securities investors.b MTS was the largest market in Europe selling fixed income investments.20
  • , I ) , J ) 310-004 -21-Exhibit 6a Citigroup Net Income by Business Segment, 1999-2008 (US$ millions)Business Segment 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999Global Cards $166 $4,674 $4,978Consumer Banking (12,280) 2,157 . 6,073 Total Global Consumer (12,114) 6,831 10,051 $10,897 $11,987 $9,648 $8,252 $6,813 $6,004 $4,975Institutional Clients Group (20,117) (4,155) 8,611 6,895 2,042 5,387 3,159 6,166 6,166 5,138Global Wealth Management 1,091 1,974 1,443 1,244 1,209 2,322 1,523 2,414 1,445 1,219Corporate/Other (954) (1,661) (654) (667) 48 (56) (706) (615) (858) (637)Income (loss) from continuing operations (32,094) 2,989 20,451 19,806 16,054 17,853 14,569 13,229 14,140 11,345 Net income (loss) ($27,684) $3,617 $21,538 $24,589 $17,046 $17,853 $15,276 $14,126 $13,519 $11,243Source: Casewriter estimation from Citigroups 10-Kreports, years: 2008,2006,2003,and 2001.Exhibit 6b Citigroup Net Income by Geography, 2000-2008 (US$ millions)Geography 2008 2007 2006 2005 2004 2003 2002 2001 2000North America ($29,035) ($1,825) $12,631 $11,951 $6,718a $11,272 8,409 8,753 7,290Europe, Middle East, Africa (1,741) (1,713) 2,159 1,373 2,331 1,607 1,429 1,435 1,520Latin America (1,983) 3,595 2,815 2,789 2,841 1,855 911 953 890Asia 1,619 4,593 3,500 3,776 2,603 2,587 2,742 2,478 2,241 Total Regions (31,140) 4,650 21,105 17,914 14,493 17,321 13,448 13,619 10,896Corporate/Other (954) (1,661 ) (654) (668) 48 166 7 (615) (1,050)Income (loss) from continuing operations (32,094) 2,989 20,451 19,221 16,054 17,853 13,448 13,229 12,231 Net income (loss) ($27,684) $3,617 $21,538 $24,589 $17,046 $17,853 $15,276 $14,126 $13,519Source: Casewriter estimation from Citigroups lO-Kreports, years: 2008,20072006,2004,2003,and 2002.a Includes a $4.95billion after-tax charge for the WorldComand litigation reserve charge.Note: Mexicoincluded in Latin Americaregion.
  • 310-004 -22-Exhibit 7 Citigroups Competitive Position -- Criteria 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999Industry RankingDeposits (U.S.) a Volume of time deposits #3 #4 #4 #4 #3 #3 NA NA NA NACredit Cards (U.S.) b Volume of outstanding debt #3 #3 #3 #3 #2 #1 #1 #1 #1 #1Merger & Acquisitions C Volume based on deal value #4 #3 #3 #2 #4 #4 #4 #4 #5 #7Market ShareDebt and equity underwriting C Global Proceeds 6.1% 8.0% 8.0% 8.3% 8.6% 9.3% 9.6% 10.1% 8.4% 9.0%Sources: Casewriter estimates; aNilson Reports vols: 732,756, 780, 803, 826, 849, 872, 895, 919, 2001; b Business Ranking Annual 2000-2009; cThomson Financial, SDC (based on full year business).
  • What Happened at Citigroup? 310-004Exhibit 8 Securities and Banking Significant Risk Exposure, 2007-2009 (US$ billions) Risk Exposure March 31, December 31, As of 2009 2008 2007 Sub-prime related direct exposure" $10.0 $14.1 $37.3 Highly leveraged loans and financing cornmttrnents 1.1 10.0 43.2 Alt-A mortgage securities? 1.9 12.6 22.0 Auction Rate Securities 2.9 8.8 8.0 Commercial Real Estated 5.7 37.5 53.7 Structured Investment Vehicles 0.1 16.6 46.4 Private Equity and Equity Investments 7.5 Total significant revenue items $29.2 $99.6 $210.6Source: Citigroup 2008 Ifl-K report and March 2009 Earnings Call document.aNet of impact from hedges against direct subprime asset-backed securities collateralized debt obligation super senior positions.qNet of underwriting fees.CNet of hedges.d Excluded positions that were included in the structured investment vehicles portfolio.Exhibit 9 COO league tables, 2002-2008 2008 2002-2008 2008 2007 Cumulative Number of Amount PercentRank Name Rank Rank Issues (US$ billions) of Total 1 Deutsche Bank AG 2 4 48 $11.1 8.8% 2 JP Morgan 3 2 28 6.2 6.8 3 Morgan Stanley 10 6 10 6.0 5.6 4 Bank of America Merrill Lynch 1 1 29 5.4 4.5 5 Goldman Sachs & Co. 6 9 6 5.4 4.3 6 Citigroup 2 3 21 5.4 3.7 7 Lehman Bros. 19 19 6 4.9 3.6 8 Barclays Capital 5 5 13 3.2 3.5 9 Credit Suisse 7 7 8 3.2 3.4 10 CITC NA NA 3 2.1 2.6 Others ~ 14.6 53.2 Total Market 225 $61.5 100.0%Source: Casewriter, data from Thomson Financial, accessed July 2009. 23
  • 310-004 -24-Exhibit 10 Citigroups Exposure to Subprime, Q3 2007 to Q4 2008 (U5$ billions) Q4 2007 Q1 2008 Q22008 Sept. 30, Q4 2007 Sales, Dee. 31, Q1 2008 Sales, Mar. 31, Q22008 Sales, 2007 Write- Transfers, 2007 Write- Transfers, 2008 Write- Transfers,______________ .!:E~x.t:p~o~su~r~e~s_ <towns etc. Exposures downs etc. Exposures downs etc. COO SUPER SENIOR Total Gross Exposures $53.4 $39.8 $33.2 Hedged Exposures 10.5 10.5 10.5 Net Exposures ABCP/COoa 24.9 (4.3) 0.0 20.6 (3.1) (0.7) 16.8 (2.0) (0.4) High gradeb 9.5 (4.9) 0.3 4.9 (1.0) (0.1) 3.8 (1.3) (0.5) Mezzanineb 8.3 (5.2) 0.5 3.6 (1.5) (0.1) 2.0 0.1 (0.5) ABS COO-squared 0.2 0.1 0.0 0.2 (0.1) (0.0) 0.1 0.0 (0.0) Total Net Exposures 42.9 (14.3) 0.8 29.3 (5.7) (0.9). 22.7 (3.2) (1.5) LENDING AND STRUCTURING COO warehousing/unsold tranches of ABS COOs $2.7 ($2.6) . $0.0 $0.2 (0.1) 0.1 0.2 (0.0) (0.1) Subprime loans purchased for sale or securitization 4.2 (0.2) 0.0 4.0 (0.2) (0.2) 3.6 (0.3) (0.6) Financing transactions secured by subprimeb 4.8 (0.1) (0.9) 3.8 (0.0) (1.1) 2.6 (0.1) (1.0) Total Lending and Structuring Exposures 11.7 (2.9) (0.9) 8.0 (0.3) (1.2L 6.4 (0.3) (1.7) Total Net Exposuresc $54.6 ($17.2) ($0.1) $37.3 ($6.0) ($2.2) $29.1 ($3.5) ($3.2) Reserve (credit adj.) on hedge counterparty exposure (0.9) (1.5) (2.4) Total Net Write-Downs ($18.1) ($7.5) ($5.9) ~_ __ ..J. ......l-L~
  • ) 310-00.. -25-Exhibit 10 (continued) Q3 2008 Q4 2008 June 30, Q32008 Sales, Sept. 3D, Q42008 Sales, Dec. 31, 2008 Write- Transfers, 2008 Write- Transfers, 2008 Exposures downs a etc. Exposures downs+ etc. Exposures COO SUPER SENIOR Total Gross Exposures $27.9 $2!P $18.9 Hedged Exposures 9.8 9.4 6.9 Net Exposures ABCP/COoa 14.4 (0.8) (0.3) 13.3 (3.1) (0.3) 9.9 High gradeb 2.0 0.2 (1.1) 1.1 (0.4) 0.1 0.8 Mezzanineb 1.6 0.3 (0.2) 1.7 (0.3) (0.2) 1.3 ABS COO-squared 0.2 (0.0) (0.0) 0.1 (0.1) (0.0) 0.0 Total Net Exposures 18.1 (0.3) (1.5) 16.3 (3.9) (0.3) 12.0 LENDING AND STRUCTURING COO warehousing/unsold tranches of ABS COOs 0.1 (0.0) (0.0) 0.1 (0.0) (0.0) 0.0 Subprime loans purchased for sale or securitization 2.8 (0.3) (0.4) 2.1 (0.5) (0.2) 1.3 Financing transactions secured by subprimeb 1.5 (0.2) (0.2) 1.1 (0.1) (0.3) 0.7 Total Lending and Structuring Exposures 4.3 (0.5) (0.6) 3.3 (0.7) (0.5) 2.0 Total Net Exposuresc $22.5 ($0.8) ($2.1 ) $19.6 ($4.6) ($0.9) $14.1 Reserve (credit adj.) on hedge counterparty exposure (0.9) (0.9) Total Net Write-Downs ($1.7) ($5.6)Source: Adapted from Citigroup 2008 10-K Report, p. 48; 2008 Ql 10-Q Report, P: 22; 2008 Q2 lO"Q Report, p. 30;2008 Q3 lO-Q Report, p. 34; and Casewriter estimates.a Primarily consists of high grade ABS CDOs.bIncludes credit costs.cComprised of net COO super senior exposures and lending and structuring exposures.Note: Quarterly write-downs in 2008 include profits/losses associated with liquidations ..
  • 310-004 -26-Exhibit 11 Citigroups Mark-to-Market Asset Values (FAS 157) at Year End 2007 and 2008 (US$ millions) Gross Net At December 31, 2007 Levell Level 2 Level 3 Inventory Nettin~a Balance Assets Federal funds sold and securities borrowed or purchased under agreements to resell $- $132,383 $16 $132,399 $(48,094) $84,305 Trading account assets Trading securities and loans 151,684 234,846 75,573 462,103 - 462,103 Derivatives 7,204 438,779 31,226 467,209 (390,328) 76,881 Investments 64,375 125,282 17,060 206,717 - 206,717 Loans? 3,718 9 3,727 - 3,727 Mortgage servicing rights 8,380 8,380 - 8,380 Other financial assets measured on a recurring basis 13,570 1,171 14,741 (4,939) 9,802 Total assets $223,263 $938,578 $133,435 $1,295,276 ($443,361) $851,915 17.2% 72.5% 10.3% 100.0% Gross Net At December 31, 2008 Levell Level 2 Level 3 Inventory Nettinga Balance Assets Federal funds sold and securities borrowed or purchased under agreements to resell $- $96,524 $- $96,524 ($26,219) $70.305 Trading account assets Trading securities and loans 90,530 121,043 5Q,773 262,346 - 21?2,346 Derivatives 9,675 1,102,252 60,725 1,172,652 (1,057,363) 115,289 Investments 44,342 111,836 28,273 184,451 - 184,451 Loans" 2,572 160 2,732 - 2,732 Mortgage servicing rights 5,657 5,657 - 5,657 Other financial assets measured on a recurring basis 9,890 359 10,249 (4,527) 5,722 Total assets $144,547 $1,444,117 $145,947 $1,734,611 ($1,088,109) $646,502 8.3% 83.3% 8.4% 100.0%Source: Adapted from Citigroups 20081O-K report, pp. 197-198.aRepresents netting of: (i) the amounts due under securities purchased under agreements to resell and the amounts owed under securities sold under agreements to repurchase in accordance with FIN 41,and (ii) derivative exposures covered by a qualifying master netting agreement in accordance with FIN 39, cash collateral and the market value adjustment.bThere was no allowance for loan losses recorded for loans reported at fair value.
  • 310-004 -27-Exhibit 12 Derivative Exposure, 2005-2008EXPOSURE BYNOTIONAL AMOUNTa (US$ billions) Asset/Liability Trading Derivativesv-S Nontrading Derivativesd Management Hedges" As of December 31 2008 2007 2006 2005 2008 2007 2006 2005 Total interest rate contract notionals $23,747.0 $25,362.9 $22,028.7 $18,352.1 $945.7 $881.8 $684.9 $481.0 . Total foreign exchange contract notionals 4,069.9 5,155.7 3,612.2 2,575.5 107.1 123.3 98.4 92.0 Total equity contract notionals 1,094.6 1,361.7 884.3 491.3 Total commodity and other contact notionals 168.9 153.5 81.9 53.4 Total credit derivatives 3,033.5 3,674.8 1,945.0 1,030.7 Total derivative nationals $32,113.9 $35,708.6 $28,552.2 $22,503,012 $1,052.8 $1,005.1 $783.3 $573.1aInciudes the notional amounts for long- and short-derivative positions.bTrading Derivatives includes proprietary and market-making activities where the changes in market value were recorded to trading assets or trading liabilities.cTrading Derivatives include proprietary position: as well as certain hedging derivatives instruments that qualified for hedge accounting in accordance with SFAS No. 133, Accolllltillg for DailtltiveInstruments and Hedging Activities (SFAS 133).dNontrading derivatives include only those end-user derivative instruments where the changes in market value were recorded in Other Assets or Other Liabilities.eAsset/Liability Management Hedges include only those end-user derivative instruments where the changes in market value were recorded to other assets or other liabilities.
  • 310-004 -28-Exhibit 12 (continued)EXPOSURE BY MARK-ro-MARKET (MTM) AMOUNT, (U5$ billions) Derivatives Receivables-MTM Derivatives Payable-MTM As of December 31 2008 2007 2006 2005 2008 2007 2006 2005 Trading Derivativesb Interest rate contracts $ 667.6 $237.7 $167.5 $192.8 $ 654.2 $237.9 $166.1 $188.2 Foreign exchange contracts 153.2 77.9 52.3 42.7 160.6 72.0 47.5 41.5 Equity contracts 35.7 27.4 26.9 18.6 57.3 66.9 53.0 32.3 Commodity and other contracts 23.9 8.5 5.4 7.3 225 8.9 5.8 7.0 Credit derivatives (2007, 2008) 14.1 8.1 15.1 9.3 Citigroup as the Guarantor 5.9 5.0 198.2 73.1 Citigroup as the Beneficiary 222.5 78.4 5.5 11.2 Cash collateral paid/received9 (2007, 2008) 63.9 32.2 65.0 19.4 Total $1,172.7 $467.2 $266.2 $269.6 $1,163.3 $489.4 $287.4 $278.2 Less: Netting agreements, cash Collateral and market value adjustments (1,057.4) (390.3) (216.6) (222.2) (1,046.5) (385.9) (212.6) (216.9) Net Receivables/Payables $115.3 $76.9 $49.5 $47.4 $116.8 $103.5 $74.8 $61.3 Net ReceivablesJPayablese (2007, 2008) AsseULiability Management Hedgese (2005, 2006) Interest rate contracts $14.8 $8.5 $1.8 $3.8 $7.7 $7.2 $3.3 $1.6 Foreign exchange contracts 2.4 1.6 3.7 1.4 3.7 1.0 1.0 1.1 Total $17.2 $10.2 $5.5 $5.2 $11.5 $8.1 $4.3 $2.8Source: Adapted from Citigroups 2008 lO-K report, pp. 90-91 and 2006 lO-K report, p. 69.bTrading Derivatives includes proprietary and market-making activities where the changes in market value were recorded to trading assets or trading liabilities.eAsset/Liability Management Hedges include only those end-user derivative instruments where the changes in market value were recorded to other assets or other liabilities.fCredit derivatives were arrangements designed to allow one party (the "beneficiary") to transfer the credit risk of a "reference asset" to another party (the "guarantor"). These arrangements allowed aguarantor to assume the credit risk associated with the reference asset without directly purchasing it. The Company entered into credit derivatives positions for purposes such as risk management, Yieldenhancement, reduction ofcredit concentrations and diversification of overall risk.gIn addition to the cash collateral paid or received, as of December 31,2008 the Company provided $7.9 billion and received $6.8 billion of marketable securities as collateral under derivative contracts. -(-(-
  • ·What Happened at Citigroup? 310-004 Endnotes 1 [an Hopkins, Charles Molineaux, Citicorp!Travelers Merger CNNfn: Street Sweep6 April 1998, via Factiva, accessed January 8, 2009. 2 "Citigroups confused chemistry," Euromoneq on the Web, January 1, 2000, http://www.euromoney.com. accessed June 2009; Carolo J. Loomis, "CitiCorp: Sandy Weills Monster," Fortune, April 16, 2001, http://www.fortune.com. accessed June 2009; "King of Capital, Part 1," BusinessWeek, June 25, 2002,. http://www.businessweek.com. accessed June 2009. 3 David Wighton, Financial Times, London Ed.I, October 6, 2004, p. 17, at http://w4.stern.nyu.edu/news/nsews.cfm?doc_id=3193, accessed January 7, 2009. 4 "Citicorp.Travelers to merge," Reuters News, April6, 1998,via Factiva, accessed January 8, 2009. 5 "Citigroups confused chemistry," Euromoneu on the Web, January 1, 2000, http://www.euromoney.com. accessed June 2009. 6 http://home3.americanexpress.com/ corp/ os/history.asp, accessed January 7, 2009. 7 Ibid. 8 Ibid. 9 Bill Stoneman, "Cross-Selling Proves to Be a Hard Sell at Citigroup," American Banker, Vol. 167, No. 199, October 17, 2001, p. 8A, via Factiva, accessed January 8, 2009. 10 "Citicorp.Travelers to merge," Reuters News, April 6, 1998,via Factiva, accessed January 8, 2009. 11 Putnam Lovell Securities, "Citigroup Inc.: A Truly Diverse Player" Commercial Banking Report, June 2001. 12 Sanford C. Bernstein & Co, Inc. "Citigroup: Not Your Fathers Cross-Selling Synergies," Bernstein Research, April 17, 1998. 13 "Citigroups confused chemistry," Euromoneq on the Web, January 1,2000, http://www.euromoney.com. accessed June 2009. . 14 Duncan Hughes, Citigroup faces a tough new reality where big is not necessarily beautiful, The Business, 15 September 2002, via Factiva, accessed January 8, 2009. 15 Ibid. 16 "Citigroups confused chemistry," Euromoney on the Web, January 1, 2000, http://www.euromoney.com. accessed June 2009. 17 John Capper, "Time to give something back, Bob," Financial Times on the Web, December 3, 2008, http://www.us.ft.com. accessed June 2009. 18 Monica Langley, Tearing Down the Walls (New York, NY: Simon & Schuster, 2003) p. 279. 19 Ibid, p. 279. 20 Ibid, p. 302. 21 Ibid, p. 349. 22 Putnam Lovell Securities, "Citigroup Ine.: A Truly Diverse Player," Commercial Banking Report, June2001. 23 Putnam Lovell Securities, "Citigroup Inc.: A Truly Diverse Player;" Commercial Banking Report, June2001. 29
  • 310-004 What Happened at Citigroup? 24 Jon Birger; With Nick Pachetti, "Leader Of The Pack; SANDY WEILL HAS BUILT CITIGROUP INTO AFINANCIAL SERVICES EMPIRE. IS HIS FORMULA FOR SUCCESS A BLUEPRINT FOR THE REST OF THEINDUSTRY?" Money Magazine, June 2002. 25 David Reich-Hale, "Trimming the Financial Supermarket Down to Size, American Banker Vol. 167, No.9,January 14,2002. 26 Jon Birger; With Nick Pachetti, "Leader Of The Pack; SANDY WEILL HAS BUILT CmGROUP INTO AFINANCIAL SERVICES EMPIRE. IS HIS FORMULA FOR SUCCESS A BLUEPRINT FOR THE REST OF THEINDUSTRY?" Money Magazine, Vol. 31, Issue: 6, June 12002, via Factiva, accessed January 8, 2009. 27 David Boraks, "Citi Cites Cross-Sell Woe in Spinoff," American Banker, Vol. 167, No. 243, December 202001, via Factiva, accessed January 8, 2009. 28 David Reich-Hale, "Trimming the Financial Supermarket Down to Size, American Banker Vol. 167, No.9,January 14,2002. 29 Jon Birger; With Nick Pachetti, "Leader Of The Pack; SANDY WEILL HAS BUILT CmGROUP INTO AFINANCIAL SERVICES EMPIRE. IS HIS FORMULA FOR SUCCESS A BLUEPRINT FOR THE REST OF THEINDUSTRY?" Money Magazine, June 2002. 30 Carol J. Loomis, "CitiCorp: Sandy Weills Monster," Fortune, April 16, 2001, http://www.fortune.com.accessed June 2009. 31 Ibid. 32 Putnam Lovell Securities, "Citigroup Inc.: A Truly Diverse Player," Commercial Banking Report, June200I. 33 Carol J. Loomis, "CitiCorp: Sandy Weills Monster," Fortune, April 16, 2001, http://www.fortune.co~.accessed June 2009. 34 Joseph N. DiStefano, "Prince tears up Weil playbook, forfeits shareholder returns," Bloomberg.com, October4,2007, http://www.bloomberg.com. accessed June 2009. 35 Tearing Down the Walls, p. 258. 36 Carol J. Loomis, "CitiCorp: Sandy Weills Monster," Fortune, April 16, 2001, http://www.fortune.com.accessed June 2009. 37 Ibid; Peter Truell, "Salmon set to end group on arbitrage," New York Times on the Web, July 7, 1998,http://www.nytimes.com.accessedJune2009;JustinBaer •••Maherasr Citigroups high roller, sheds caution inprofit quest: Bloomberg.com, September 5, 2006, http://www.blommberg.com. accessed June 2009. 38 "Citigroup has Highest Risk Board in the US According to The Corporate LibraryS new rating ofCorporate Directors," PR Neuisunre, June 9, 2003, via Factiva, accessed July 6, 2009 39 Eric Dash and Landon Thomas [r., "The Man in Citis Hot Seat," New York Times, Late Ed., p. 1, October 7,2007, via Factiva, accessed February 6, 2009. 40 Daniel Kadlec, Daren Fonda and [yoti Thottam, "Citi Gets A New Prince", Time, July 2003. 41 "Prince for a Weill- The Challenges Facing the New Boss of Citigroup," The Economist, January 1,2004, viaFactiva, accessed July 20, 2009. 42 Gary Silverman, "The Citi states next ruler - MAN IN THE NEWS - CHARLES PRINCE", Financial Times,July 19,2003. 43 Mara Der Hovanesian, "Rewiring Chuck Prince; Citis Chief Hasnt Just Stepped Out of Sandy WeillsShadow - Hes Stepped Out of His Own as He Strives to Make Himself into a Leader with Vision," BusinessWeek, February 20, 2006, via Factiva, accessed July 20, 2009. .30
  • What Happened at Citigroup? 310-004 -H "Forget Sympathy-Citigroup Needs a Clean Up," EuroWeek, October 8,2004, via Factiva, accessed July 20,2009. 45 Citigroup 2003 Annual Report, page 2. 46 Greg Farrell, Gary Silverman, Francesco Guerrera, "Universal Model Fades as Bank Goes Back to Basics,"Financial Times, London Ed2,January 14,2009, p. 22, via Factiva, accessed February 5, 2009. 47 Aaron Elstein, "Citi switches to slow lane; Shuns acquisitions, gets outscored on branches; investors jumpship. Changing Banks," Crains New York Business, July 19, 2004. 48 Marcia Vickers, Doris Burke, "The Unlikely Revolutionary Critics are sniping and the stock is lagging, butCitigroups Chuck Prince keeps charging ahead, blowing up business practices put in place by his famed mentor,Sandy Weill," Fortune, March 2006. 49 Peter Lee, "What Citigroup needs to do next," Euromoney on the Web, July 1, 2005,http://www.euromoney.com. accessed June 2009. 50 Stephen Timewell, "Bring Me Your Consumers, Your Unbanked Masses ..." The Banker, June 1, 2006, viaFactiva, accessed January 14,2009. . 51 Andrew Bary, "Citigroup is booming, but its shares arent: Sandy Weill not pleased," Barrons, March 17,2004. 52 Marcia Vickers, Doris Burke, "The Unlikely Revolutionary Critics are sniping and the stock is lagging, butCitigroups Chuck Prince keeps charging ahead, blowing up business practices put in place by his famed mentor,Sandy Weill," Fortune, March 2006. 53 Eric Dash and Julie Creswell, "Citigroup saw no red flags even as it made bolder bets," New York Times onthe Web, November 23, 2008,http://www.nytimes.com. accessed June 2009. 54 Eric Dash and Julie Creswell, "Citigroup saw no red flags even as it made bolder bets," New York Times onthe Web, November 23,2008, http://www.nytimes.com. accessed June 2009; Eric Dash and Louise Story, "Rubinleaving Citigroup; Smith Barney for sale," New York Times on the Web, January 10, 2009,http://www.nytimeS.com. accessed June 2009. 55 Ibid. 56 Eric Dash and Julie Creswell, "Citigroup saw no red flags even as it made bolder bets," New York Times onthe Web, November 23,2008, http://www.nytimes.com. accessed June 2009. 57 Peter Lee, "What Citigroup needs to do next," Euromoney on the Web, July 1, 2005,http://www.euromoney.com. accessed June 2009. 58 "Rewiring Chuck Prince," Business Week, February 20, 2006 athttp://www.businessweek.com/magazine/content/06_08/b3972105.ht. accessed March 12,2009. 59 Carol Loomis, "Can Anyone Run Citigroup?" Fortune, May 5, 2008, p. 80, via Factiva, accessed March 6,2009. 60 "Rewiring Chuck Prince," Business Week, February 20, 2006 athttp://www.businessweek.com/magazine/content/06_08/b3972105.ht. accessed March 12,2009. 61 Marcia Vickers and Doris Burke, "The Unlikely Revolutionary," Fortune, March 2006. 62 CarolLoomis, "Can Anyone Run Citigroup?" Fortune, May 5, 2008, p. 80, via Factiva, accessed March 6,2009. 63 Peter Thai Larsen and David Wighton, "Under fire," Financial Times, October 9, 2006. 31
  • 310-004 What Happened at Citigroup? 64 Mara Der Hovanesian and Maria Bartiromo, "CLEANED UP BUT FALLING BEHIND," BusinessWeek,October 2006. 65 Peter ThaI Larsen and David Wighton, "Under fire," Financial Times, October 9, 2006. 66 Mara Der Hovanesian and Maria Bartiromo, "CLEANED UP BUT FALLING BEHIND," BusinessWeek,October 16,2006. 67 "Citigroup Earnings Decline," FinancialMirror, April 18, 2007,via Factiva, accessed March 11,2009. 68 Joseph N. DiStefano, "Prince Tears up Weil playbook, forfeits shareholder returns," Bloomberg.com,October 4,2007, http://www.bloomberg.com. accessed June 2009. 69 Eric Dash and Julie Creswell, "Citigroup saw no red flags even as it made bolder bets," New York Times onthe Web, November 23, 2008,http://www.nytimes.com. accessed June 2009. . 70 Citigroup 2007 Annual Report, p. 5. 71 Eric Dash, "Is the Dance Over? Citigroup is Upbeat," August 3 2007, athttp://www.nytimes.com/2007/08/03/business/03citi.html? _r=1&th&emc=th&oref=slogin, accessed February6,2009. 72 Ibid. 73 "Citigroups management window dressing," Euromoney on the Web, January 1, 2007,http://www.euromoney.com. accessed June 2009;Joseph N. DiStefano, "Prince tears up Weil playbook, forfeitsshareholder returns," Bloomberg.com, October 4, 2007,http://www.bloomberg.com. accessed June 2009. 74 Eric Dash, "Investors flee chiefs fund at Citigroup," New York Times on the Web, May 3, 2008,http://www.nytimes;com, accessed June 2009; Carolo J. Loomis, "Can anyone run Citigroup," Fortune, May 5,2008, http://www.fortune.com. accessed June 2009. 75 Duff McDonald, "The hanger-on," New York Magazine, October 15, 2007, http://www.nymag.com.accessed June 2009. 76 Landon Thomas Jr. and Eric Dash, "Big Shake-Up as. Citigroup Combines Two Key Units," New YorkTimes, Late Ed., p. 1, October 12, 2007, via Factiva, accessed February 6, 2009. 77 Jonathan Stempel and Dan Wilchins, "Citigroup May Face $11 Billion Writeoff," Reuters News, November5,2007, at http://www.reuters.com/article/topNews/idUSWEN234820071105. accessed July 9, 2009. 78 Ibid. 79 JPMorgan, Citigroup lnc., SIV concerns overdone, current steps expandable, October 25, 2007; "Citigroup Inc. toDiscuss Recent Announcements - Conference Call," Thompson StreetEvents, November 5, 2007; "Q3 2007Citigroup Inc. Earnings Conference Call," Thompson StreetEvents, October 15, 2007; Citigroup, 2007 Q3 lOQ(New York: Citigroup. 2007). 80 Carol Loomis, "Can Anyone Ruri Citigroup?" Fortune, May 5, 2008, p. 80, via Factiva, accessed March 6,2009. 81 Ibid. 82 Christian Plumb and Dan Wilchins, "Citi to take $49 bIn in SIVs into balance sheet," Reuters, December 13,2007, http://www.reuters.com. accessed June 2009; "Citigroup makes $49bn SIV rescue," BBC News on theWeb, December 14, 2007, http://www.bbc.co.uk, accessed June 2009. 83 Greg Morcroft & Alistair Barr, "Clti names Pandit CEO; Bischoff is chairman," MarketWatch, December 11,2007. 84 Ibid.32
  • What Happened at Citigroup? 310-004 85 Carol Loomis, "Can Anyone Run Citigroup?" Fortune, May 5, 2008, p. 80, via Factiva, accessed March 6,2009. 86 Ibid. 87 Shawn Tully, "Say Goodbye To the Big Citi," Fortune, January 15, 2009,http://money.cnn.com/2009/01/14/magazines/fortune/investing/citi_future.forhme/index.htm. 88 Carol Loomis, "Can Anyone Run Citigroup?" Fortune, May 5, 2008, p. 80, via Factiva, accessed March 6,2009. 89 Ibid. 90 Francesco Guerrera, "Flawed conception," Financial Times, Asia Ed1, January 17, 2009, p. 8, via Factiva,accessed February 5, 2009. . 91 Eric Dash and Andrew Sorkin, "Citigroup buys bank operations of Wachovia," New York Times on the Web,September 30, 2008, htpp:/ /www.nytimes.com. accessed June 2009; David Mildenberg and Bradley Keoun,"Wells Farfos $12 billion bid beats Citi to Wachovia," Bloomberg.com, October 10, 2008~htpp:/ /www.bloomberg.com.accessedJune2009. 92 Mara Der Hovanesian, "Citigroups uneasy victory," BusinessWeek.com, November 25, 2008, accessed viaFactiva, June 2009. 93 "Citigroup CEO Pandit gets emergency help," Reuters, November 24,2008. 94 David Enrich, "Rubin Departs Citi on a Low Note," The Wall Street Journal, January 10, 2009. 95 Chicago Tribune Wire Reports, "Richard Parsons, former Time Warner CEO, to replace Win Bischoff aschairman of Citigroup," January 21, 2009. 96 "Citigroup Ready to Shrink Itself by a Third," Wall Street Journal Online, January 14, 2009. 97 Madlen Reed and Sara Lepre, "Citigroup Breaks Up: Financial Supermarket Model Dead," AP, January 14,2009. 98 Diana Golobay, "Citigroup Confirms Brokerage Spinoff Plans", HousingWire, January 13, 2009. 99 Paul Tharp, "CITIS PANDIT VOWS TO TAKE $1 SALARYAND NO BONUS," New York Post, February12,2009. 100 Citigroup, First Quarter 2009 Earnings Review, April 17,2009. 101 Stephan Labaton, "Treasury to set top pay at 7 ailing firms," New York Times on the Web, June 10,2009,http://www.nytimes.com. accessed June 2009. 102" Administrative Actions on Citibank, N.A., Japan Branch," Financial Services Agency, Government ofJapan, September 17, 2004 (provisional translation by the FSA). 33
  • HARVARD BUSINESS SCHOOL~~! - 9-109-015 REV: FEBRUARY 9, 2009ROBERT SIMONSKATHRYN ROSENBERGAmerican Cancer Society: Access to CareQuestion:"Which source would you trust the MOST for providing accurate and up-to-date cancer information?"Answer: 34% Your personal physician National Cancer Institute ••••••... t1% Som eone who has had cancer 13% -2007 _i:#•• ~.~~Il,II!~ 16% .~ 2005 _4% Local hospitals , 3% 2003 ::;•• 4% _2% U.S. Surgeon General 4% 6% • 1% Reports on television 1% 1) 2% .2% None ofthese 1% 1% _---_._-- ..Source: American Cancer Society documents.Professor Robert Simons and Research Associate Kathryn Rosenberg prepared this case with the assistance of Research Associate NatalieKindred. Our thanks to Johanna Ralston, Vice President of Global Strategies American Cancer Society, HBS AMP 172, for providing the idea forthis case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primarydata, or illustrations of effective or ineffective management.Copyright © 2008,2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163,or go to www.hbsp.harvard.edu/educators.This publication may not bedigitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
  • 109-015 American Cancer Society: Access to Care Atlanta, Georgia. Februarq, 2006. Dr. John Seffrin, CEO of American Cancer Society, knew as hewalked into the boardroom that it was going to be a long, intense meeting. He was preparing toannounce to the National board of directors that current estimates indicated that ACS would notmeet its 2015 Goals. Notwithstanding this disappointing news, Seffrin was feeling optimistic. He andhis executive team had come up with a new initiative-Access to Care--that he believed could bridgethe gap between success and failure. As Dr. Seffrin explained: In the last 60 years, science has made remarkable progress toward unraveling the mystery of cancer. But so much of what we know about cancer is not being adequately translated into what we do about cancer. People continue to experience unnecessary suffering and death not because we dont know how to prevent cancer or detect it early or treat it, but because we refuse to ensure that all people have equal access to lifesaving cancer advances .. The premise behind the Access to Care initiative was simple: the largest unaddressed problem inthe fight against cancer was not lack of science, technology, or resources-it was lack of access toquality health care. As Seffrin elaborated: One of the early things that we did was to create a National Cancer Database that tracks cancer outcomes and whether or not an individual has health insurance. We found that the existence of insurance is highly correlated to both stage of diagnosis and outcome. For example, our research showed. conclusively that a woman with Stage I breast cancer but no health insurance was more likely to die than a woman with health insurance who had more advanced stage II cancer. Seffrin knew that he would have to explain Access to Care thoroughly to the board. Following ashake-up 10 years earlier, the level of engagement by the board was intense: it did not rubber-stampinitiatives or give blanket approvals. Instead, the ACS board of directors was actively involved insetting and ratifying strategy. He recounted: The board said to me, "Mr. CEO, you have to tell us what we have to do to make this happen." I responded that there were three things that were really huge, but would allow us to eliminate cancer as a major public health problem: (1) Redouble research efforts, especially in areas such as genome mapping; (2) Elevate prevention through public policy; and (3) Ensure access to quality health care. They had heard me say this before, but the big Aha was the realization that the only thing that could ever keep us from meeting our goals was the third point-Access to Care. Lack of access was a major cancer killer and growing.History of American Cancer Society American Cancer Society was founded ir11913 as the American Society for the Control of Cancer.At the time, a cancer diagnosis was tantamount to a death sentence and, as a result, cancer was rarelydiscussed in public. A primary mission of the organization was to increase public awareness ofcancer to bring more attention and resources to diagnosis and treatment. In 1945, the organizationwas renamed American Cancer Society and began an earnest research campaign. In the more than 90years of the organizations history, ACS had funded hundreds of scientists, including more than 40researchers who went on to win a Nobel Prize.2
  • American Cancer Society: Access to Care 109-015 By 2008, the mission of the American Cancer Society was to "eliminate cancer as a major healthproblem by saving lives, diminishing suffering, and preventing cancer through research, education,advocacy, and service." ACS received its funding through the charitable contributions of millions ofindividual donors. With annual revenues of more than $1.1 billion, the average donation to ACS wasonly $75. As Dr. Seffrin pointed out, "Ninety-seven percent of our gross receipts come fromindividual donors. So if people dont like what were doing, they just stop giving." ACS was one of the largest charitable institutions in the United States. (For a list of the top 20 not-for-profit corporations in the Ll.S; see Exhibit 1) In 2008, American Cancer Society had more than7,700 full-time employees and 3million active volunteers.Dr. John Seffrin Prior to his appointment as CEO of American Cancer Society in 1992, Dr. John Seffrin was aprofessor of health education and chair of the department of applied health science at IndianaUniversity. Like many American Cancer Society employees, Dr. Seffrin was personally affected bycancer, losing both his mother and a grandmother to the disease. He first joined American CancerSociety as a volunteer in 1972, and spent time serving on a variety of committees at his regionalchapter. He then served as a board member, both locally and nationally. Dr. Seffrins ambitions for ACS were bold: "I was asked what my vision was when 1 wasappointed. I answered, To become a co-equal partner with government and the private sector tobring cancer under control and become the number one nonprofit in America. Upon taking charge, Seffrin inherited an unwieldy organization with 57 independentlyincorporated and managed divisions. Dr. Rich Wender, president of the National board of directors,remembered, "When John took over as CEO, there was an incredible amount of distrust between thedivisions and National. Part of the tension was due to the fact that the divisions raise the money, but40% of their receipts must be remitted to National." One of Seffrins first tasks was to consolidate the 57 local units into 13 regional divisions. His nextstep was to form a National Executive Team (NET) that included the 13 division CEOs. Mike Dany,CEO of the High Plains Division said, "Creating NET was very important. For the first time, thisallowed the sharing of best practices among divisions. You just couldnt do this when there were 57CEOs." Debate within the NET was spirited, but Seffrins respect for the work of the organization and theviewpoints of others within ACS was legendary. Seffrin explained: You can only move an organization like ours through leadership. Each of the 13 divisions has its own CEO and independent board. So they dont have to do what 1tell them. Therefore, we put a lot of energy into communication. But its not as difficult as it sounds. What makes it all work is everyones strong commitment to help others-its just unbelievable ... from our Relay for Life, to our Hope Lodges, to our Call Center ... If you really believe in something, care about something, then youre willing to go the extra mile.2015 Goals In 1996, American Cancer Society executives, staff, and volunteer leaders collaborated withexternal consultants in an ambitious brainstorming or "Futuring" exercise. The results of that exercisewere the 2015Goals, around which the organization built its ongoing strategy: 3
  • 109-015 American Cancer Society: Access to Care • 50°Ir, reduction in cancer death rates by the year 2015 • 25% reduction in cancer incidence rates by the year 2015 • Measurable improvement in the quality of life (physical, psychological, social, and spiritual) from the time of diagnosis and for the balance of life of all cancer survivors by the year 2015 Dr. Seffrin reminisced about the process of setting the 2Q15Goals: Dr. Phil Cole, a cancer epidemiologist from the University of Alabama, participated in the futuring initiative. When we came up with our initial goals, Dr. Cole said, "You cant project that cancer death rates will decline. Cancer death rates have been going up every year all of our lives." He rattled off some statistics and I was a bit crestfallen. But he called me up after he crunched some numbers and said, "John, Im calling to tell you I was wrong. My whole career as a physician and researcher I have believed that any progress that weve made in cancer has just been prevention-like people who quit smoking or who never start. But we now have evidence that both prevention and improved therapy are saving lives, and the cancer death rates are starting to go down." Overall cancer mortality rates peaked in the early 1990s. Between 1993 and 2002, death ratesdropped about 1.2% per year. Between 2002 and 2004, cancer death rates declined 2.1% per year,reflecting improvements in prevention, early detection, and treatment. This decline in the cancerdeath rates translated to half a million deaths avoided between 1991 and 2004. The cost savings werealso enormous: one study estimated that a 10%reduction.in cancer deaths would be worth $5 trillionin economic value. Translating the Societys mission into such concrete goals-both lives saved andvalue to society-was instrumental in attracting resources and volunteers. The 2015 Goals were also valuable in galvanizing the organization and aligning the regionaldivisions to work together. Mike Dany, CEO of the High Plains Division, said, "The futuring exercisethat resulted in our 2015 Goals forced us to commit ourselves to aspirational outcomes."Organization of American Cancer Society In 2008, American Cancer Society comprised a National Home Office based in Atlanta, Georgiaand 13 regional divisions, each independently incorporated. The divisions consisted of divisionheadquarters and multiple local offices, ensuring there was American Cancer Society presence inmost communities in the United States. The consolidation of geographic regions from 57 to 13 was matched by a contraction of theNational board of directors, the governing body of ACS. In 1996, the board had been made up ofmore than 220 volunteers from all over the country; by 2008, there were just 43 board members. Dr.Rich Wender, president of the board of directors in 2008, noted there had also been a shift in themake-up of the board. Im the first primary care physician to be president of the board. I was brought in because of the critical role that primary care physicians play in the cancer fight in general and in Access to Care in particular. These days, ACS has a closer relationship with the American Academy of Family Physicians than with the American Society of Clinical Oncology.1 KMurphy and R. Topel, "The Economic Value of Medical.Research," University of Chicago, March 1998;revised September1999.4
  • American Cancer Society: Access to Care 109-015 Its critically important to get the right board leadership-individuals who fit well with the strategic agenda. The person following me is an oncologist who does preventive care work with the Latino community. The next president will be the first non-physician. She is the dean of the School of Public Health at Louisiana State University. The only person who answers to the board is the National CEO-John Seffrin. The board sets strategic measurable goals for the CEO and also the boundaries within which the CEO must operate. These CEO limitations stipulate what the CEO must not do; although it seems counterintuitive, this has the effect of providing full freedom of action to the CEO within these prescribed limits. . - Susan Herrington, VP of governance, further elaborated the relationship between Dr. Seffrin andhis board of directors: We have an explicit set of boundaries-we call them the executive limitations-that are written in negative language. Let me give you two examples. For asset protection, the CEO limitations state, "the CEO shall not fail to comply with all Board established financial policies or fail to report to the Board sufficient financial information on a quarterly basis to demonstrate continued compliance with these policies." For communications, the executive limitations state, "The CEO shall not permit the board to be uninformed or shall not fail to marshal points of view." Seven board committees divide up the monitoring of-these limitations and report to the larger board. They rely on a set of monitoring reports to show whether the CEO is in compliance with these policies. If the CEO is operating within these boundaries, everything else is presumed to be OK. The National board of directors was elected by the National Assembly which comprised sixvolunteer delegates from each division as well as past officer delegates. The National Assembly mettwice annually. Figure A, on the next page, shows the structure of American Cancer Society.Chartering the Regional Divisions Each of the 13 divisions of American Cancer Society signed a charter every three years, whicharticulated the expectations and agreements between the division and the National Home Office. Thechartering process required each division to undergo both an operational assessment of the divisionsperformance and a financial audit overseen by ACSs external auditors. As part of the chartering·process, representatives from the National Home Office visited each division to measure progressagainst agreed-upon goals and to reaffirm objectives for the coming year. The chartering process was a critical part of ACSs success. Susan Herrington, VP of governance,explained: Each regional board of directors has an audit committee, but because there are 13 different divisional organizations, we insist that regions use the same auditor. Today it is Ernst & Young. We are in much better place today than we were a decade ago when each division had a different auditor. We can now identify high risk in a division. This is very important to us because the actions of any division can impact our national reputation. 5
  • 109-015 American Cancer Society: Access to CareFigure A StructUre of the American Cancer Society National Home Office Regional Divisions CHARTERING National Assembly ................................................. : (sotunteers ) PROCESS CEO 13Di-.ision CEOs National Home Office ... ... ... ... ... 3 million volunteersSource: Casewriters.The benefits of strong controls and oversight were apparent to Mike Dany, CEO of the High PlainsDivision: Our internal controls are much better today than they were in the past. We have provided better external data for our scorecards and evaluations, instituted a nationwide internal audit process, and created a hotline that provides a conduit for questions or concerns from staff and volunteers. Our governance processes are also constantly being improved. We have provided the boards with opportunities to discuss issues in closed sessions without the CEO or other staff. We have created independent compensation committees staffed by volunteers supported by external consultants. We also now have a full-time general counsel to provide legal support to the board. As CEO of a division with our own board of directors, these enhancements have been extremely helpful.6
  • American Cancer Society: Access to Care 109-015 Ensuring consistency throughout ACS and its various divisions was critical for achieving the 2015Coals and attracting and retaining donors. Don Cudaitis, CEO of the New England Division,described how such consistency was achieved: There are three mechanisms to get everyone aligned. First is the chartering process. The regions and National meet regularly to discuss and agree on what we are doing-to get buy-in. Second, there are incentives for collaboration. National makes program dollars available to the divisions, but they require us to document that we are spending that money to support the strategic agenda. Finally, our 2015 Goals forced us to commit ourselves to shared outcomes. We asked McKinsey to help us develop a scorecard to track our progress. We now have scorecards for each region that are compiled into what we call a national Dashboard. We have a full time person who we hired away from McKinsey to oversee metrics. She works at different levels across the organization to ensure that the best information is provided to the CEO review committee and the boards of directors. One of the effects of the consolidation of divisions and formalization of the chartering process wasincreasing uniformity across all divisions. However, some within the organization worried that theuniformity might dampen local innovation or diminish customization for regional differences. NewEngland Division CEO Gudaitis explained: Theres an 80/20 split inside AC5-80% of our resources are devoted to national leadership goals with specific targets, and 20% to local initiatives. But theres a constant push and pull to try to get the balance right. The National organization sees benefits from greater consistency and the regions cite many of their innovative successes. For example, the major fundraising event that sustains the organization today is the Relay for Life. It was begun by a volunteer in the Seattle area. This idea was replicated across the country and now raises almost half a billion dollars a year. Our most rapidly growing event is "Making Strides Against Breast Cancer" which was begun in Boston 16 years ago. Similarly, the idea of working with consumer health access organizations to expand access to health care and expand tobacco taxes was begun here in the Northeast and replicated around the country. A lot of this debate-managing the tension between national programs and local initiatives-takes place within the NET and as part of the chartering process.The Mission American Cancer Society pursued its mission of cancer reduction in three primary ways: (1)Patient Services, (2) Research, and (3) Prevention/Detection/Treatment. The organization also had anactive advocacy department that supported those initiatives through education and direct andgrassroots lobbying at the federal, state, and local levels. Figure B shows the proportion of expensesspent on each of the functional areas of ACS for 1996through 2007.Patient Support Comprising 22% of total expenses in 2007, patient support services included a website and 24-hour call center offering information about cancer diagnosis and treatment. According to GregDonaldson, VP of corporate communications, "Our call volume dwarfs the next closest source, theNational Cancer Institute. We get 1.3 million calls per year to our 24--hour,bilingual call center. TheNCI-an arm of the government-gets about 300,000 calls per year." In addition, ACSs website,www.cancer.org, received roughly 19 million unique visits per year. 7
  • 109-015 American Cancer Society: Access to CareFigure B American Cancer Society Expenses by Function, 1996-2007 24%i~ 22% ~I~~--------L-----------------------------------~r--Ii t--.i QJ 20% ! ..-.------"~ r ~::.-.-~-.--.".-.-"~-.---.~----.-i~-" ~-- r-.,-. -- -- Patient services -.,... Prevention1-18% I ---~~------~~~~----------------~.r-ns I ~ .~-.DetectionlTreatment .io II~ 16% ll---------------~-.--. - :,;.-.-.~$,__.• "1u-- ... .• ., ~_.- .:£il- , .It 14% j _ .e.e:.~"------------------------~--~t---4;r=~--- ,>-V. --- Research~I ~ 12% ~ Q. II .0% i996 .99! 998 999 2000 200. 2002 2003 2004 2005 2006 2007Source: Company documents. Further patient support services included support groups, transportation, and housing forpatients and families at ACS sponsored "Hope Lodges." Greg Bontrager, chief operating officer, said: The question we ask patients when they call in is, "What is standing between you and quality care?" American Cancer Society tries to fill in the gaps. If you need a ride to an appointment, we have transportation for you. It you need a place to stay, we have a Hope Lodge for you. If you have questions about your insurance, we have a resource center for you. If you need emotional help, we have a support group for you. In 1999, American Cancer Society became the first traditional nonprofit to launch paid advertisingcampaigns. As Donaldson pointed out, "ACS does not advertise to fundraise, we advertise tomission-to promote cancer awareness and education." Although the $15 million spent per year onadvertising was modest as a percentage of overall revenue, it was a groundbreaking move in theworld of not-for-profits.Research The ACS Research Program began in 1946 with a $1 million fund. Over more than six decades, thefocus had shifted from funding established researchers to giving smaller grants to younger scientistswho were earlier in their research careers and more likely to realize groundbreaking innovation. In2007, ACS dispensed more than $116 million in research grants to 313 external researchers. Internally, ACS researchers focused on epidemiological studies (the study of factors affecting thehealth of populations), surveillance research, and behavioral studies. For instance, in 1960 ACSdesigned a study of a million participants that showed conclusively that smoking tobacco led to earlydeath from lung cancer. Based on this research, the U.S. surgeon general stated publicly that smokingtobacco was linked to lung cancer. A more recent epidemiological study led by ACS researchers-and linked directly to the new Access to Care initiative-showed conclusively that outcomes for8
  • American Cancer Society: Access to Care 109-015cancer patients without health insurance were worse than for insured patients, regardless of relativestage of diagnosis.Prevention/Detection(freatment American Cancer Society pursued a strategy of cancer prevention and early detection bypromoting healthy living and routine screening for colorectal, breast, and cervical cancers. Accordingto the 2007 ACS annual report: Current knowledge iridicates that up to 70% of all cancers may be prevented through widespread implementation of effective interventions. Tobacco use, physical inactivity, obesity, and poor nutrition are major preventable causes of cancer and other diseases in the United States. Current scientific evidence indicates that the wider application of available screening and early detection techniques can significantly reduce the number of deaths from breast, cervical, and colorectal cancers. Aside from avoiding tobacco and maintaining a healthy weight, getting recommended cancer screenings is the most important thing people can do to reduce their risk of dying from cancer. In addition to promoting cancer screening directly to the public, ACS and its affiliate advocacyorganization, the American Cancer Society Cancer Action Network, worked at the state and federallevel to pass legislation ensuring access to screening. In some instances, this meant advocating forinsurance changes so that routine screening would be covered. In other instances, it meant helpingpass laws ensuring that mammograms would be offered free of charge to the uninsured. Dr. Otis Brawley joined American Cancer Society as the chief medical officer in September, 2007.As a newcomer to the organization (at ACS, the average tenure of VPs and above exceeded 17 years),he commented: ACS is not a culture, its a cult. People here are religiously against cancer ... which is a wonderful thing, but, as a result, they are sometimes not able to ask good scientific questions .. every cancer drug and every cancer screening test must be good. But getting the science right is extremely important to our reputation and our Access to Care initiative. In 1993, ACS recommended that all men over 50 have a PSA test- for prostate cancer screening. Shortly thereafter, the Wall Street Journal published an article describing how Abbott Labs-who make the PSA test-had been a financial donor to ACS. Then, subsequent research showed that prostate cancer screening does not necessarily save lives. It was obvious that we had overstepped the science and risked our reputation. We have now changed the recommendation: men should be offered the PSA tests and informed of the benefits and risks. In other cases, the evidence is clear. We have conclusive evidence that routine colonoscopies and mammograms save lives, so our recommendation is unequivocal: everyone should get those screenings early and regularly. Notwithstanding these concerns, some at ACS worried that the organization moved too slowly inresponse to new cancer threats or treatments. They wanted to be able to point, for example, to an ACSposition on the possible correlation between cell phone use and cancer. However, Brawley wasadamant that ACS could not make any recommendations, or even suppositions, without thoroughand rigorous research backing the Societys position. He remembered:2 Prostate Specific Antigen, or PSA, is a blood test that measures levels of the PSA protein, which can be an indicator ofprostate cancer. 9
  • 109-015 American Cancer Society: Access to Care I can give you an example of the risks of making policy that is not based on scientific evidence. In the early 1960s, ACS recommended that every adult get a chest X-ray for lung cancer. This recommendation was made even though there had been no randomized trials to test whether X-rays did indeed save lives. By 1975, the Mayo trials showed that the death rate was actually higher for people who received chest X-rays. After that we declared, "We will never again make a recommendation without sound scientific evidence."Measuring and Motivating Success ACS set mission objectives and tracked income development, fundraising efficiency, andpercentage of dollars allocated to mission. Though each division was responsible for its own financialresults, only the consolidated financials were presented to the public. Summary financial informationis presented in Exhibits 3 and 4. The organization had also developed a scorecard that was used in each division, with somecriteria that were specific to a particular region and others that were consistent nationally. Forexample, one division had a metric pertaining to the number of legislative meetings the staff was ableto secure on tobacco-related issues; another had a goal concerning ethnic diversity. Criteria that wereconsistent across divisions were rolled up to a national Dashboard (see Exhibit 2), which waspresented annually to the board. All of the metrics tied directly back to the mission, either byshowing progress against the 2015 Goals, or by correlating to directives outlined in the charteringprocess.Terry Music, chief mission delivery officer, said of the diagnostic measures: Our volunteer leadership establishes end goals-for example, a shift in screening or mortality rates-that are related to our 2015Goals. These goals require that we monitor certain broad outcome measures. Unfortunately, you cant always attribute results directly to our efforts, but there is a correlation. ACS is comfortable with that ambiguity. We tend to accept responsibility for failure to achieve results, but we dont claim victory when the numbers are going our way. As a result, we are constantly adjusting what we do to try to achieve our goals. All metrics were shared across divisions to encourage sharing of best practices. Don Gudaitis,New England Division CEO, recounted: We had thought in the New England Division that we were doing as much as we could in the arena of cancer control for patients. But analysis of the comparative data showed that we were lagging. We looked at two other divisions in particular-Heartland and Florida-to see what they were doing because their results were much better than ours. We learned that they were using their 800-numbers in a new and different way. Weve since replicated their systems and have already seen results-improvement in the area of cancer control. This kind of result is one reason there isnt an institutional resistance to a high level of transparency and sharing. Throughout American Cancer Society, most employees were motivated by personal connectionsto the mission of the organization: either they were cancer survivors themselves, or they could tell astory of how their lives had been touched by the disease. As Dan Smith, president of the AmericanCancer Society Cancer Action Network put it, "There is not a lot of pay for performance here. We paya decent wage for a nonprofit, but people come here because they are motivated by the mission. Mostpeople who come here have a personal story about cancer." Mike Dany, CEO of the High Plains Division, echoed this sentiment: "We have tried to becompetitive with wages in the marketplace, but there is something special here about the nature of10
  • American Cancer Society: Access to Care 109-015our work. At the end of the day, you feel that youve done something that really means something topeople."Strategy = Choice + Focus Senior executives at ACS were aware of their success and the need to continually reinventthemselves to adapt for the future. Don Gudaitis, CEO of the New England Division explained: I worry that we have been around so long and have such a high trust level that niche organizations that are attached to visible personalities may drive us into the background. How do we avoid becoming just wallpaper when people are more enthused by Patrick Dempseys endorsement of the Central Maine Cancer Center or Lance Armstrongs Foundation? Then theres the Dana Farber Cancer Institute and the Susan Komen Breast Cancer Foundation ... How do we avoid becoming too generic? Our new Access to Care initiative may be the answer ... we really need to shake the tree. The Access to Care initiative was a bold step for ACS and Dr. Seffrin was fully aware of therisks: . Focusing on Access to Care as a core strategy is very risky. It brings in a whole lot of other dimensions of public policy. And when you talk about expanding access, it can easily become a political issue. As 1 have said already, 97% of our gross receipts come from individual donors who can stop giving at any time. So, we must guard our brand very carefully. Dr. Rich Wender, president of the National board of directors, was also mindful of the publicsperception of the Society. He said, "I worry about our incredible bigness. Everything that we do is sopublic. We have to raise a billion dollars each year, yet the average gift is only $75. You must be verycareful not to do anything to alienate people."But the stakes were high. Dr. Seffrin had a unique view of what it would take to succeed: To me the critical question is, "Can we get a seat at the table?" 1 think that were winning this battle. Last week, there was a meeting called by AHIP (Americas Health Insurance Plans), representing all the major players within the health care system, with the agenda of looking ahead to health care reform for 2009.Dan Smith and Wendy Selig were invited to this meeting. So, it was all the huge insurance players plus ACS CAN. We have gone from a wonderful cancer care organization that raised money for research and services to a major public health organization that is called upon for national policy expertise and follow-through.Access to Care "We will not step auf and call for a single payer system." -Dr. John Seffrin The Access to Care initiative was a significant departure in strategy for American Cancer Society.As a public health organization, ACS had always focused specifically on cancer treatment, research,and prevention. With the Access program, ACS was proclaiming publicly that policy makers neededto "fix the nations broken healthcare system." Mike Dany, CEO of the High Plains Division, said: Weve always tried to address Access to Care through information, transportation referrals, and housing. All those are small efforts to ensure that patients get the care they need. 11
  • 109-015 American Cancer Society: Access to Care However, whenever there is a disparate outcome for a patient because of lack of access to medical care, that is something that we, the American Cancer Society, should address, because its not dependent on science. We have the ability to save more lives and its unacceptable to not try to do that. One of our strengths is that we arent partisan; we can get the most liberal and conservative people to sit at the same table and unite around the fight against cancer. There are no agreed- upon solutions that will solve Access to Care. Its very complex. But first of all, you must communicate why this is so important. In advocating Access to Care, some-both inside and outside the organization-feared that ACSwould be taking a political stance, either by promoting a particular political candidate or allying itselfwith a particular party philosophy. To counter this concern, ACS executives were explicit that, whilethe Society would evaluate legislative health coverage. proposals and might choose to support oroppose them, it would never endorse or oppose any candidates plan. (Other explicit boundariesincluded never endorsing consumer products and never allowing individual pharmaceutical brandsto underwrite or sponsor ACS initiatives.) Despite these assurances, there was resistance. In a New York Times article, an ACS regional boardmember was quoted, "Expanded access to insurance coverage is not our fight. To me, its throwingaway money that we could have put into providing free mammograms or free PSA tests or freecolonoscopies."? The decision was controversial outside the organization, too. Don Gudaitis, New EnglandDivision CEO said, "Major donors-some giving over $100,000per year-were lost to ACS becauseof misunderstanding of what we were advocating. They thought that by Access to Care, we meantuniversal health care or socialized medicine." Other donors chose to restrict their donations so thatthey could ensure their money didnt help fund the Access to Care initiative. Dan Smith, President of the ACS Cancer Action Network, admitted that he had been uncertain atfirst that pursuing Access to Care was the right strategic choice for the organization. He recalled: In 2006,John and the board made a decision to move forward on Access to Care. I argued against this because I thought that it was too big and would distract us. But John was right. We have been enormously successful with this initiative. There is a revolution going on in this blue-haired organization, but its a "velvet" revolution. John has done it with such skill. Hes taken an organization which in many ways could have veered into oblivion. Hes had a vision of where he thought this organization should go, and hes allowed people to come along for that ride. Ive been one of those people who were fortunate to come in at the right time and help him begin to realize what hed laid out. But I think thats an extraordinary gift, especially in an organization as big and conservative as we are. Access to Care was an initiative with a series of stages, beginning with extensive research andinternal policy development, to ensure people at all levels of the organization could answer anyquestions raised about the program. Months were spent traveling throughout the country, describingAccess to Care to staff, board members, and volunteers, and getting top-to-bottom buy-in for theinitiative. The first and most public part of the Access to Care initiative was a large scale televisionadvertising campaign. (See Exhibit 5.)3 Kevin Sack, "Cancer Society Focuses Its Ads on Uninsured," NI!W York Times, August 31, 2007.12
  • American Cancer Society: Access to Care 109-015 The Access to Care initiative changed resource allocation within ACS. Dr. Wender, president ofthe National board of directors, explained: There has been a significant change in who we see as our primary customer. In the past, we talked about patients, but we organized our resources and attention for the benefit of oncologists and other cancer specialists. But we now realize that, if Access to Care is our main goal, we must have a far closer relationship with patients and their primary care physicians. We are winning the cancer battle by making the family physician a key partner. This change in emphasis has resulted in a marked change in how we allocate resources.Seffrin elaborated: With our new Access to Care strategy, we couldnt stop our research or our call center, but we did make a huge decision to reorient our entire media budget=-Slf million. For over a decade, we were the first volunteer health organization to do paid media campaigns (instead of just funneling money into research). For example, we worked to increase the awareness of men over 50 to get colonoscopies. With our new Access to Care strategy, we decided to put our entire ad budget into educating people about Access to Care instead of reminding people to get mammograms and colonoscopies.Advocacy The new Access to Care strategy would require advocacy-influencing public policy outcomes.Mike Dany, CEO of the High Plains Division, remarked, "Advocacy is now critical to our mission. Atone time it would have been unthinkable." American Cancer Society and its regional divisions were nonprofit corporations exempt. fromfederal tax under section 501(c) 3 of the Internal Revenue Code. As such, they were subject tostringent regulations regarding the amount of political work in which they could engage withoutjeopardizing their tax-exempt status. To support its new advocacy mission, ACS created a newaffiliate in 200l-American Cancer Society Cancer Action Network, or ACS CAN. This new entitywas exempt from tax under section 501(c) 4 and also exempt from lobbying limits. Stephen Finan,associate director of policy for ACS CAN, explained: ACS is a C3. The rule for a C3 is that "no substantial part" of its activities may be spent on lobbying. And the "no substantial part" has been interpreted as about 5% of expenditures. Thats the line that a lot of nonprofits follow, but its not really set, so if you get close to 5%, you get kind of nervous. The important thing about forming a C4 is that a C4 can raise its own money, what we call "hard dollars," that enable the C4 to do electorally related activities-like developing voter guides-that the C3 could never do with any amount of money that it raised. ACS CAN was well prepared to take on the part of the Access to Care fight that would be wonthrough legislative changes. In 200l-when ACS CAN was formed-approximately 30 NationalHome Office employees worked full-time on advocacy issues. By 2008, the number of Nationalemployees engaged in advocacy work had grown to nearly 60. ACS CAN worked in the political arena to encourage legislators to pass laws supporting the causeof the American Cancer Society: extending coverage for cancer screening, providing access totreatment for all cancer patients, increasing funding for cancer research, tightening regulations onsmoke-free laws, and raising tobacco excise taxes. The benefits of advocacy were explained by Dan Smith, president of ACS CAN: 13
  • 109-015 American Cancer Society: Access to Care Between 1998 and 2003, the federal government doubled the budget for the National Institutes of Health, and that was done through advocacy. Though we wouldnt take sole credit for the doubling, we made a critical difference at a number of points in the legislative process to ensure that funding was increased. It wasnt just the American Cancer Society-it was a number of groups interested in medical research that worked together with a very simple message: we should double the budget. It shows the power of advocacy. ACS CAN lobbied at the federal level and worked closely with representatives of the regionaldivisions to ensure consistency of message. Smith discussed the importance of focusing limitedresources: When I started here, ACS was on a million different bills. We now realize, as John Seffrin says, the keys to success are choice and focus. We have to pick a couple of issues and stick with them. For example, in 2000 we decided to focus on tobacco taxes and clean indoor air. As a. result, we have seen tobacco taxes raised in 44 states. We are now focusing on colorectal screening-the second leading cancer killer. But of course, focus means making choices. We are now doing less on prostate cancer screening and HPV4 vaccines. Its hard to say no because you want to please everyone--but we have to. Cooperation with the divisions was imperative--one of the core strengths of ACS was its pool ofthree million volunteers who could be mobilized to influence their own elected officials to deliverACS messages. Smith, president of ACS CAN, said: For ACS CAN, there is a tremendous amount of interaction with the field. We have a VP for field advocacy who spends a lot of time in the divisions working on shared goals. We have monthly calls with all advocacy field staff. We have training two times per year with the advocacy field staff and I have day-long planning meetings with my counterparts in the regions twice per year.This view resonated with Mike Dany, CEO of the High Plains Division: There has been a substantial increase in our level of investment in the regions to support advocacy. Weve hired our own advocacy staff including an advocacy director who had experience with the American Heart Association and the Campaign for Tobacco-Free Kids. We have also invested in local and statewide political issues like smoke-free and proposition 15 ($3 billion pool for additional research). And we are focusing our volunteer resources on advocacy. But energizing an organization to advocacy brought with it risks-both to ACS CAN and to theentire American Cancer Society reputation. Dan Smith explained: When we formed ACS CAN, there was a real risk around our advocacy efforts. Our lawyers helped us formulate strategic boundaries to ensure our reputation and integrity. These include: • We will not be partisan • We will not endorse a political candidate • We will not give money to political candidates • We will not form a PAC (political action committee)4 HPV = human papillornavirus, an SID that can cause cervical cancer.14
  • American Cancer Society: Access to Care 109-015 ACS CAN also helped develop policy positions for the entire organization, including the regionaldivisions. Christy Schmidt, policy director for ACS CAN, described the process: We develop policy principles by forming a Policy Review Group, which is comprised of roughly 30 volunteers and staff from around the country. Well have a closed door debate on the issue, and collaboratively compose our policy document, which is then distributed throughout the organization. The communications team translates our policy documents into "message wheels," which enable staff and volunteers to get our position points at a quick glance.The Access to Care message wheel is reproduced as Exhibit 6.ACS CAN and Access to Care The launch of the ACS advertising campaign for Access to Care was the end of the first phase inthe Access initiative. Wendy Selig, VP of external affairs and strategic alliances at· ACS CAN,explained, "We realized that Access to Care is not a project that had a beginning and an end. We hadto organize ourselves to leverage and maximize what we were doing. We formed a staff structure anda volunteer structure that would develop further policy principles, communicate policies to thedivisions, and execute necessary research to support the initiative." The infrastructure built tosupport Access to Care is shown in Figure C.Figure C Access to Care Nationwide Project Structure ICS CAN ACS National 13 Division Board of Directors Board of Directors Boards of Directors ACSCAN 13 Regional Divisions Access to Care Access to Care ACS CAN Nationwide Implementation Team Implementation TeamSource: Casewriters. The key committee was the Nationwide Steering Committee which was a cross-functionalleadership team to guide the strategic direction of the implementation teams. It comprised seniorleadership from the National Horne Office, including Dr. Seffrin (CEO), Dr. Brawley (chief medical 15
  • 109-015 American Cancer Society: Access to Careofficer), Dan Smith (president ACS CAN), Terry Music (chief mISSIOndelivery officer), GregDonaldson (VP corporate communications), Scott Bennett (VP marketing), and Susan Herrington (VPstrategic governance). Mike Dany, CEO of the High Plains Division, represented the divisions. The Access to Care ad campaign launched in September 2007 and brought hundreds of responsesfrom the public, both positive and negative. However, extensive market research conducted after thetelevision ads aired showed that, as a result of the ads, 49% felt better about American Cancer Society,49% felt the same, and just 2% felt unfavorably. Selig, strategic coordinator for the Access to Care initiative, was adamant that the televisioncampaign was only the beginning-there was still much work to be done. As she put it: We began on insurance. That was our first place to focus. As result of that, people have begun to equate Access to Care with expanded insurance coverage. However, its much broader than that for us. Were now designing our communications to say its really about the continuum of care-from wellness all. the way to end of life-that were talking about improved Access to Care. Insurance coverage is a critical component, but there are other things that are equally important: the health care delivery system, how we promote and deliver prevention services, and what happens to someone from point of diagnosis to when they die, whenever may be.Like ACS, ACS CAN relied heavily on measurement. Dan Smith said: For ACS CAN, we measure our advocacy success by tracking changes in laws and public policy. We measure increases in tobacco taxes and ·how many citizens are smoke-free. We measure the number of Americans that have insurance to cover the ACS recommendations for colorectal screening. But we dont have control over all aspects of the process. Therefore, we measure incremental successes too. For example, getting a bill introduced or moving a bill forward in the legislative process may be a significant success when major policy changes can take 10 years or more. Or we may measure how many co-sponsors we have for an important policy bill. Wendy Selig spoke about the alignment of performance objectives and incentives. Since she joinedACS in 2000, there had been a change in how advocacy performance was reviewed: instead of vagueand highly subjective reviews, the focus was now on specific metrics and benchmarks. Sheexplained: The kind of work we do in advocacy is highly uncertain-you can do every single thing youre supposed to do and the bill still wont pass. Therefore, you have to design objectives that are within the individuals control, and we try to do that. But some things are more measureable than others. As a result, sometimes its more important to measure inputs than outcomes. But, as ACS CAN president Dan Smith concluded, "Results motivate people. Weve been able todemonstrate that were making a difference, and that provides the ultimate motivation."16
  • American Cancer Society: Access to Care 109-015Exhibit 1 Forbes 2007 List of Top 20 u.s. Charities ($ millions) Total Total SurplusRank Organization Net Assets Revenue Expenses (Loss) 1 Salvation Army 9,643 3,324 2,996 309 2 Shriners Hospitals for Children 9,536 1,241 605 636 3 Nature Conservancy 4,247 1,066 672 394 4 Mayo Clinic 4,076 6,713 6,027 513 5 Memorial Sloan-Kettering Cancer Center 3,642 2,077 1,787 290 6 American Red Cross 3,186 6,020 5,481 539 7 Metropolitan Museum of Art 2,703 577 280 279 8 Boys & Girls Clubs of America 2,614 1,449 1,271 178 9 New York-Presbyterian Hospital 2,268 3,075 2,754 32110 Childrens Hospital ~,023 1,189 1,001 18811 Cleveland Clinic Foundation 1,770 4,006 3,705 30112 Childrens Hospital of Philadelphia 1,729 1,198 965 23313 Goodwill Industries Intemational 1,715 2,933 2,805 12814 Habitat for Humanity International 1,544 1,170 1,148 2215 St Jude Childrens Research Hospital 1,509 671 507 16416 American Cancer Society 1,473 1,132 963 16917 Girl Scouts of the USA 1,390 788 744 4418 Smithsonian Institution 1,370 588 388 20019 Museum of Modem Art 1,114 288 216 7220 Museum of Fine Arts, Houston 1,068 262 83 179Source: http:/ / www.forbes.com/2007 /11/21/ largest-american-charities-pf-philo-07 charities-cz_ wb ~1121 charities_land.html. 17
  • 109-015 American Cancer Society: Access to CareExhibit 2 ACS National Metrics Relative to 2015Goals Trend to 2015 Baseline to fromNationwide 2015 Goals 2004 baseline 2015 goalCancer incidence reduction 10.20% 13.50% 25%Cancer mortality reduction 13.70% 36.80% 50%Colorectal Screening 2002 2004 2006 2010 goal 2015 goalCombined screening for all adults aged 50+ 49.5% 51.8% 55.1% 60.0% 75.0%Combined screening for uninsured adults aged 50+ . 23.6% 24.2% 25.2% 60.0% 75.0% 2010 2015Adults - Current Smokers 1965 1990 2003 2005 2006 goal goalPercent of all adults who have ever smoked 100cigarettes and currently smoke 42.4% 25.5% 21.6% 20.9% 19.7% 18.5% 12.0%Percent of adults with low education who haveever smoked 100 cigarettes and currently smoke 29.7% 32.6% 27.7% 18.5% 12.0% 2010 2015Youth - Current Smokers 1993 1995 1997 1999 2001 2003 2005 goal goalPercent of students who smoked cigaretteson one or more of the past 30 days 30.5% 34.8% 36.4% 34.8% 28.5% 21.9% 23.0% 15.0% 10.0%Mammography 2000 2002 2004 2006 2010 goal""Percent of all women aged 40 and older who had amammogram within the past year 62.6% 61.5% 58.3% 61.2% -90.0%Percent of uninsured women aged 40-64 who had amammogram within the past year 36.4% 36.6% 32.9% 34.9% 90.0%Source: Company documents.18
  • American Cancer Society: Access to Care 109-015Exhibit 3 American Cancer Society Statement of Activities 2004 2005 ( 2006 2007$ in thousandsRevenue, Gains and Other SupportSupport from the public:Contributions 596,931 189,899 200,945 221,694Special Events 469,097 499,468 544,132Other support (legacies and bequests, contributed merchandise, etc.) 271,509 270,591 268,874 273.499Total support from the public 868,440 929,587 969,287 1,039,325Other income, gains, and revenue 58,056 48,264 68,393 132,595Total Revenue, Gains and Other Support 926,496 977,851 1,037,680 1,171,920ExpensesProgram Services:Research--support provided to academic institutions and scientists to seek new knowledge about the causes, prevention and cure of cancer, and to conduct epidemiological and behavioral studies 120,429 121,317 136,357 146,933Prevention--programs that provide the public and health professionals with information and education to prevent cancer occurrence or reduce risk of developing cancer 169,815 171,350 186,374 176,573Detection/treatment--programs that are directed at finding cancer before it is clinically apparent and that provide information and education about cancer treatments for cure, recurrence, symptom management and pain control 131,194 139,117 147,407 158,231Patient support--programs to assist cancer patients and their families and ease the burden of cancer for them 160,152 173,823 194,802 218.440Total program services 581,590 605,607 664,940 700,177Supporting services:Management and general expenses 63,547 70,577 91,259 90,596Fundraising expenses 177,483 190,078 207,333 198,247Total supporting services 241,030 260,655 298,592 288,843Total program and supporting services expenses 822,620 866,262 963,532 989,020Change in net assets due to accounting or pension plan liability changes (10,849) 40,446 (94,351) 69,066Change in Net Assets ("Net Income") 114,725 71,143 168,499 113,834Net Assets, beginning of year 1,118,524 1,233,249 1,304,392 1,472,891Net Assets, end of year 1,233,249 1,304,392 1,472,891 1,586,725Source: Company documents. 19
  • 109-015 American Cancer Society: Access to CareExhibit 4 American Cancer Society Balance Sheet 2006 2007$ in thousandsAssetsCash and Temporary Investments 967,137 1,000,292Securities Lent Under Securities Lending Program 83,957 181,169Collateral Received under Securities l.endinq Program 85,705 184,749Pledges and Grants Receivable, net 55,509 67,309Prepaid Pension Costs 30,711Prepaid Expense and other Assets 37,761 43,864Legacies and Bequests Receivable 90,370 96,759Beneficial Interests in Trusts 318,209 341,557Fixed Assets, net 247,821 329,288Investments, at fair value 67,973 75,110Total Assets 1,985,153 2,320,097Liabilities and Net AssetsResearch and other Program Awards and Grants Payable 197,182 208,967Accounts Payable and Accrued Expenses 151,520 201,967Gift Annuity Obligations 26,207 25,859Payable Under Securities Lending Program 85,705 184,749Other Liabilities 23,394 36,143Debt 28,247 75,680Total Liabilities 512,255 733,365Unrestricted Net Assets 1,058,638 1,100,004Temporarily Restricted Net Assets . 174,121 229,026Permanently Restricted Net Assets 240,139 257,702Total Net Assets 1,472,898 1,586,732Total Liabilities and Net Assets 1,985,153 2,320,097Source: Company documents.20
  • American Cancer Society: Access to Care 109-015Exhibit 5 ACS Access to Care Advertising ImagesSource: Company documents. 21
  • 109-015 ~merican Cancer Society: Access to Care . ...,./Exhibit 6 American Cancer Society "Access to Care" Message Wheel The American Cancer Society and ACS CAN are Working to Improve Access to Quality Health Care Were making progress in the fight against cancer, but millions of Americans arent benefiting because they dont have access to quality health care. After more-than a decade of declining cancer death rates as a proportion of the population, the actual number of cancer deaths has fallen for two straight years. The Society and ACS , • Howe-.er, millions of Americans still arent Americans shouldnt have to CAN are working to " benefiting from the progress being made. choose between their health e leva Ie the issue of and financial ruin, access to care leading up to the 2008 elections and beyond. 47 million Americans are uninsured, and millions more are underinsured - their insurance fails to orovce adequate coseraqe when they are diagnosed with cancer. / Nearly half of uninsured cancer patients said they used up all or most of their sawnqs • Were adopting a multi- as a result of the financial cost year strategy tor leadership Many others fOrego early detection tests because of cancer, and 1 in 5 insured on healthcare reform they do not recognize their lifesaing potential. cancer patients said they used issues. up all or most of their sa";ngs. Through adl.ertising, media outreach, grassroots / 4 in 10 cancer patients skip treatment, cut pills or asoio filling prescriptions due mobilizing, and Winning the fight against cancer collaborations with partner to cost depends on improving access to organizations, well frame the issue through the quality health care. Society researchers hao,e "cancer lens" and educate found that the uninsured and / consumers, policymakers, people with Medicaid are more and candidates. likely to be diaqnosed with advanced cases of cancer than Well introduce these Throughout its history, the Society has those with private insurance. audiences to our principles worked to improve access to quality care, tor quality health care and Health insurance should be our methods for evaluating adequate, affordable, The Societys Cancer Resource Network reform proposals. available, and administratio,ely provdes information about cancer prevention, simple. / early detection and treatment; answers to Join us and do financial and insurance questions; help with something about it, too. transportation and lodging; and hope and support Logon to from others who have been there. www.cancer.orglaccess. The American Cancer Society Cancer Action Network (ACS CAN) supports legislation and policies at the federal, state, and local leo,el that ensure more people hao,e access to cancer presention, early detection and treatment. Call1-800-ACS-2345 or logon to www.cancer.org or www.acscan.org to get the help you need.Source: Company documents.22
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